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.

The Challenges of Short vs. Long Term Thinking  

February 11th, 2015

I’ve spent the last few days at a conference with customers, other printers, and suppliers to printers.  It’s unique in that the conference attendees consists of a lot of owners and senior executives at all of the firms represented.  We had a breakout session that focused on what seemed like a simple question: What’s your value proposition?

The facilitator did a great job leading with probing questions.  What do you do that’s unique?  What do your customers value?  How do you communicate your message?  We worked in rotating groups of 4 or 5 people, so I got to hear a lot of perspectives.  It was definitely eye opening.  Two competing thoughts keep circulating in my head since that session.  First, what we think is unique probably isn’t.  Everyone used words and phrases like partner, value add, we educate our customers.  I realized all our customers hear from all of us is, “Blah, Blah, Blah.”  We all sound the same.  Remember – these phrases came from the senior executives of all the firms.  If we can’t articulate, our message, how can anyone else within our organizations do it?  Huge opportunity for improvement!

Second, as I walked out of the room, I thought of Mike Tyson’s great line, “Everyone has a strategy until they get punched in the face.”  It’s great to hear a consultant talk about strategy, segmenting customers, and getting paid for the value you bring.  But when you’re not hitting your budget or a big order didn’t materialize, it’s hard feel good about your strategy.  Without short term success, there is no long term.  I spent time as a strategy consultant and really enjoy thinking “what if.”  I also have payroll to make, suppliers to pay, and bank debt to repay, so I need to live in reality.  Somewhere, there’s a balance between short term and long term thinking that we must achieve.  If individuals don’t have balance between short and long term thinking, there’s no way organizations will.  To conclude my Mike Tyson analogy, imagine if someone had convinced him that his short term lifestyle and choices were ruining his long term likelihood of success, he probably would have beaten Buster Douglas and had a different trajectory for the next several years.  You can’t ignore Buster Douglas (short term challenges).  You also can’t just look at today’s challenges and ignore long term trends.  It’s not easy but it sure is fun!

Staples and Office Depot Merger: It will have an Impact on the Label Industry

February 4th, 2015

After months of speculation, it was announced today that Staples is buying Office Depot.  While both buy and sell labels, the major impact this potential combination will have on the label industry has nothing to do with their label activities.  It is far more significant to our industry than just their status as users, producers, and sellers of labels.

In 1997, Staples and Office Depot tried to merge.  The FTC blocked the merger, citing its impact on the competitive landscape.  How the world has changed since 1997.  This little thing called the internet has spawned new competitors in the office supply market.  Office Depot bought Office Max a few years ago without a peep of concern from government regulators.  All indications are the government will not block a Staples-Office Depot merger.  In 2013, Staples, Office Depot, and Office Max were all separate entities, competing for consumer and business dollars.  By the end of this year, they’ll be one company.  Think about what that does to the market dynamics.

I bring this up because of what happened in the good ol’ pressure sensitive industry in 2003.  Old timers will recall UPM Raflatac tried to buy MacTac.  The Department of Justice’s Antitrust Division blocked the acquisition citing its impact on the competitiveness of the US market.  The FTC won a court ordered injunction which essentially says one of the top players in the PS industry (Avery Dennison and UPM Raflatac) can never buy a major competitor.  Practically, this injunction prevents  any major consolidation in the PS industry (See link below for a summary).  I can assure you that some sharp legal minds and investment bankers are closely watching the Staples – Office Depot situation and will be calling on the PS industry soon with advice.  Remember – never is a very long time.

Based on the yearend financial reports of the major laminate suppliers, it is pretty obvious that PS growth has slowed in the US.  To repeat my broken record: our industry is maturing.  Mature industries consolidate.  It’s been happening slowly.  Expect the pace to pick up soon.  If you’re a student of strategy, I recommend you pull out Michael Porter’s, “How Competitive Forces Shape Strategy.”  It was written in 1979.  Our industry is slow to change, so it’s just as relevant today is it was 36 years ago.  Link is below

 

http://www.ftc.gov/sites/default/files/documents/reports_annual/26th-report-fy-2003/040903hsrrpt03_0.pdf

 

https://hbr.org/1979/03/how-competitive-forces-shape-strategy/ar/1

Stay Patient, My Friends  

January 27th, 2015

 

I love the Dos Equis ad campaign in which the Most Interesting Man in the World (He took the title from me.) proclaims, “I don’t always drink beer but when I do, I prefer Dos Equis.”  He ends each spot with, “Stay thirsty, my friends.”  I think I am going to end each blog this year with, “Stay patient, my friends.”

The verbal sparring regarding the Greece situation has started in full force.  In case you missed it, the socialist leaning party won the election in Greece.  They want the European Union to provide leniency on Greece’s repayment of bailout money.  The EU has indicated it will not bow to Greece’s demands and is demanding Greece repay its debts.  US durable goods orders dropped in December, prompting concerns of an economic slowdown.  Several large companies have reported earnings that missed expectations and they are warning about earnings shortfalls for the coming year.  Everywhere you look there’s bad news yet again.  Or is there?

Perhaps the most significant news impacting the packaging industry this week is Rock-Tenn and Mead Westvaco announced they are merging.  Combined, they will have nearly $16 billion in revenue worldwide in the containerboard/corrugated segments.   Once again, a mature industry is demonstrating that consolidation will improve the profit pool.  That will continue to put pressure on other public companies in packaging to seek strategic alternatives.  For those of us that are smaller players in the packaging industry, this pressure will create great opportunities.  As with any large merger, there will be job losses from synergies between the two companies.  I’m sure that won’t be a lot of fun for a lot of people.  However, there will be talented people available that can contribute to your business almost immediately.  There will also be opportunities for competitors to take share due to the distractions associated with the merger.  There will also likely be large suitors looking for “tuck in” acquisitions of smaller players.

In my little world of labels, Honeywell, which purchased Intermec a few years ago, announced it was acquiring Datamax in mid December.  The same results demonstrated above apply to this acquisition.  Disruption creates opportunities.  While the macro economy gets all the news, the real action happens on the micro economy level.  Pay attention to what’s impacting your world and stay patient with the what is happening in the world, my friends.

Hoping for a Price Decrease?  Think Again.  

January 21st, 2015

 

With the fall in oil prices, a lot of customers are calling us wondering when price decreases are coming.  Certain areas of packaging have seen decreases due to raw material prices falling.  I doubt we’re going to see decreases in the label world.  Here’s why:

Why Prices Aren’t Coming Down

Pulp remains near its all time high.  Paper mills have consolidated.  Verso and NewPage just combined.  Both are large suppliers to the PS industry.  Rumor has it paper mills are starting to send increase letters out as I write.

  1. Some film products and adhesive component costs have declined, but they are still above early 2013 levels.  There was no increase in 2013 or 2014, so margins are returning to where they were.
  2. Diesel has come down but carriers are raising rates because of driver shortages, new regulations, and capacity constraints.  People are removing fuel surcharges but adding increases, making the net 2-3% instead of 5-7%.  If diesel goes back up, it’s a 5-7% increase.  As I wrote a few weeks ago, UPS and Fed Ex raised their rates again.
  3. Operating costs for everyone have gone up.  I know I’m not alone on this one – if I told you how much our healthcare costs have risen over the last 24 months, you would vomit.
  4. To end my list on a positive note, things are still OK in the US economy.  I don’t think growth is robust, but there is activity.  As long as there is demand, people aren’t cutting prices.  That’s a good thing.

If we start seeing wide spread price decreases, I think we have a bigger problem.  It is very unlikely that demand for labels will go up if prices come down.  More than likely, if prices come down, it is because we are entering a deflationary environment (not good for any of us) or economic growth has gone away.  I don’t think either scenario is likely in the US but if either happens, you better have a plan B.  Mine involves copious amounts of wine.  If economic growth continues, I would not be surprised to see a price increase later this year.

 

Do You Have a Bench?  Lessons from Ohio State’s National Championship

January 14th, 2015

One of the reasons I love sports is they provide great life lessons.  On Monday night, Ohio State completed a very unlikely run to a college football national championship.  In case you missed it, their starting quarterback, Braxton Miller, got hurt 8 days before the season started.  After a shaky start, his replacement, J.T. Barrett, turned into a Heisman Trophy (best player in college football) candidate.  He got hurt in the last game of the season, leaving the backup to the backup, Cardale Jones, as the starter.  Jones became a Cinderella story, winning the Big Ten championship game and helping Ohio State beat Alabama and Oregon to win the national championship.

Praise is being lavished upon Jones and the Ohio State coaching staff and it is justified.  Ohio State was an underdog in all three games Jones started.  They dominated 2 of the 3 games.  There are a lot of lessons from Ohio State’s success.

1. Be prepared even if you get passed over.  Cardale Jones could have checked out after being beat out for being the back up.  He was 3rd string.  3rd stringers only play in mop up time.  By all accounts, he didn’t check out.  He stayed focused and worked hard.  If you get passed over for a job or by a customer, don’t tune out.  Stay focused and figure out how to get better.  If you fade away, you’ll be forgotten.

2.  If you’re in leadership (like the coaching staff), you’ve got to make sure everyone is engaged.  There are 85 scholarship players on a Division 1 college football team.  Think about the leadership it requires to take a bunch of high school stars that were all the best players on the team and tell over 60 of them they are backups.  (Certainly several of those would play significant minutes but they aren’t starters.)  The coaching staff needs to keep them ready – players get hurt and sometimes don’t play well.  For the team to succeed, inevitably someone will need to step up from a backup role and perform.

3.  Put the team first.  Urban Meyer, Ohio State’s head coach, has said this is one of the closest teams he’s ever coached.  Meyer has had success everywhere he’s been.  He’s able to create a team first mentality throughout his organization.  Just as easily as Cardale Jones could have checked out when he was 3rd string, the team could have checked out when J.T. Barrett got hurt.  Instead, they rallied around Jones and played their three best games of the year.

We all love Cinderella stories.  Beyond every Cinderella story, there is a lot of work and emotional strength that lead to what seems improbable.  Do the work and stay emotionally attached and you can create your own Cinderella story.  (PT: Looking forward to some Oregon libations to settle the bet.  We agreed on a six pack but an Oregon Pinot Noir works as well!  Go Bucks!)

Oil Crashing, Stocks Down, Greece Potentially Exiting the Euro: Is the World Ending (Again)?  Let’s Keep Things in Perspective

January 6th, 2015

 

A hobby of mine is following financial markets.  I love hearing the latest opinions from the “experts” that grace the airwaves.  When oil started going down, it was a positive.  If I heard “lower gas prices are a tax break for the US consumer” once, I heard it a thousand times.  I do find it somewhat funny to hear people that want to raise taxes talk about gas prices going down being a tax break and a positive development.  Doesn’t that imply lower taxes would be a positive development for the economy?  Hmm…

Now that oil has come down even more, it’s now a potential negative.  The oil industry has been a key driver of employment growth in the US.  Certainly, lower oil prices could lead to job losses in that industry.  The nasty “d” word – deflation – is  being bantered about because of lower oil prices.  I’m attending a packaging conference and many petroleum based products are coming down in price.  I don’t think that creates widespread deflation in the economy.  It does mitigate some of my inflation concerns.  Diesel is starting to come down, which will lower transportation costs.  It’s going to be hard for anyone to get a price increase through with oil down significantly.  As I’ve written in the past, many of our suppliers would love to get a price increase – they saw commodity inflation last year.  They’re getting it right now through raw material decreases that they’re not going to pass through unless things get really bad.  I doubt things will get really bad.  Demand in the US is turning the corner.  Look at car sales.  I’ve written about equipment demand recently.  That’s not going away either.   I would also note oil is only one commodity.  Pulp has stayed high.  Operating costs haven’t come down.  Wage pressure is starting.

The longest losing streak for US stocks in 13 months is occurring. Stock market indices have dropped for 5 straight days.  That’s a week of trading.  Markets don’t operate in straight lines.  With all the hubbub about 100 and 200 point drops in the Dow, today’s 130 point drop represents a 0.74% decline.  Yes, not even a 1% decrease.  Let’s keep things in perspective.

Europe isn’t imploding.  Does it really matter if Greece turns more socialist and gets kicked out of the Euro?  Greece makes up less than 1.5% of the EU’s GDP.  I feel bad for the Greek people if Greece is forced out of the EU but it’s really not that big of a deal.  Is there the possibility of contagion occurring?  Sure, but I think that’s why Germany is rattling swords about kicking them out – to let others know they’re serious about keeping the EU intact.

It’s easy to get rattled as we are inundated with data and seemingly terrible news.  Don’t overreact.   As Warren Buffett likes to say, “Be fearful when others are greedy and be greedy when others are fearful.”   Instead of worrying about the global economy, worry about your customers.

 

 

A New Year’s Wish: Self Awareness

January 1st, 2015

We went to a nice buffet for New Year’s Eve dinner last night.  Our son went to get dessert.  As my wife likes to put it, I am the instigator in our family.  I took his dessert fork and substituted a little seafood fork while he was away.  He came back to the table with his cake, picked up the little fork, and exclaimed with 8 year old gusto, “What the hell is this?”  Almost instantly, his eyes bugged out and he realized he said something inappropriate.  Fortunately, my wife and I had a few glasses of wine so we found it funny and we all had a good laugh.  Of course the instant comment came from my wife, “That’s YOUR son,” with the your greatly emphasized.  It’s amazing how the inappropriate behaviors are a result of my DNA but the straight A student (with the exception of handwriting, my DNA) and everything he does right comes from her genes.

I pondered this incident, which will become a fun family memory, quite a bit last night and this morning.  My wife is right – that is my son talking.  That is exactly what I would have said had one of my brothers or a friend taken my fork.  I’d react with the same passion he did.  I’d laugh with whomever did it to me.  I thought a lot about how my actions and words have such a profound impact on his actions and words.  It’s pretty scary when you think about it.  It’s also pretty cool.  I have tremendous influence as a role model.

Not only do my actions and words have a big impact on my son, they have a big impact on our business.  Everything leaders write, say, and do is witnessed by their teams.  People have a need to fit in and belong.  By observing how their leaders act, they get their cues how to act.  Even seemingly little things, such as the dinner table incident above, can have a profound impact on your team.  If your team (or children) aren’t doing what you want, it’s probably time to look in the mirror.  Most likely, they are reflecting your behaviors.

(in case anyone is concerned, our son does know that “swears” (his term) are inappropriate (in most circumstances).)

I hope you have a great 2015 and accomplish what you want personally and professionally.

Have Yourself a Merry Little Christmas

December 23rd, 2014

I wrote this blog last year.  We attended the concert again this year but “Have Yourself A Merry Little Christmas” wasn’t on the playlist.  I think about this song quite a bit this time of year.  Merry Christmas, Happy Hanukah.

(I’m glad I checked the link for the song.  My original link was removed due to “multiple copyright infringements.”)

The last few years, Kelly and I have kicked off the holiday season by attending a Christmas concert by the Cleveland Orchestra with good friends. Regardless of your beliefs, put attending a holiday concert by an orchestra on the bucket list if you haven’t already done so. Hearing classical arrangements of carols both old and new puts things in a different light, at least for me.

The conductor did a wonderful job providing context to the songs. One in particular hit home to me. I’ve seen the movie “Meet Me in St. Louis” with Judy Garland. In that wartime movie (1944), she sings “Have Yourself a Merry Little Christmas” (video link https://www.youtube.com/watch?v=yudgy30Dd68

Warning: it will bring a tear to your eye.) The conductor explained how this became a wartime anthem in those still dark days of World War II, both home and abroad. It brought a smile to my face and a tear to my eye. My grandfather was one of those patriots that lied about his age to enlist in the Army after Pearl Harbor. He was not even 17 when the war broke out. He had just started dating my grandmother. He, of course, made it home and they got married.

I remember my grandparents singing “Have Yourself A Merry Little Christmas” to each other over the years and the looks on their faces as they sang to one another. I never understood the significance of that song until I heard the conductor’s explanation. Music was a big part of their lives and a big part of our family holidays – we sang together before we could open presents. For some reason, their musical abilities were not passed down to any succeeding generation thus far. We’re well into gen 3 and the caroling sounds worse every year.

Grandpapa and Grams, as you look down upon us, know that your love and spirits live on. Merry Christmas.