Remember Why We’re Off Monday

May 20th, 2015

 

 

As you kick off the summer season with barbecues, swimming, and auto racing, please take a little time to remember the real reason behind our celebrations: Memorial Day.  The tradition of decorating the graves of soldiers who died in battle started during the Civil War.  This simple act of remembrance continues to this day.

Please take a few minutes to read the poem below.  Be safe this weekend.

 

MEMORIAL DAY

C. W. Johnson

We walked among the crosses
Where our fallen soldiers lay.
And listened to the bugle
As TAPS began to play.
The Chaplain led a prayer
We stood with heads bowed low.
And I thought of fallen comrades
I had known so long ago.
They came from every city
Across this fertile land.
That we might live in freedom.
They lie here ‘neath the sand.
I felt a little guilty
My sacrifice was small.
I only lost a little time
But these men lost their all.
Now the services are over
For this Memorial Day.
To the names upon these crosses
I just want to say,
Thanks for what you’ve given
No one could ask for more.
May you rest with God in Heaven
From now through evermore.

 

 

 

 

With Slow Growth Come Business Challenges

May 13th, 2015

There are a few items I get in the mail that make my heart skip.  Two that come to mind are letters from the IRS and customer bankruptcy notices.  Neither is quite fun to open.  We’ve gotten a few of those lately – the IRS now requires employers to automatically adjust withholdings for employees whom it thinks aren’t withholding enough.  Who says Big Brother isn’t watching?  We’ve had a couple of customer bankruptcies already this year.  Remember, debt is your friend when you grow; it’s a problem when your business is shrinking.

Perhaps the letter that rankles me the most comes from a customer and starts with, “Dear Valued Supplier.”  Any form letter that starts that way is generally followed by requests from the customer to extract value from their supplier.  We’ve gotten more than our fair share of those lately.  They generally fall into 3 categories:

  1. Demand for a price decrease. Everyone is facing demand challenges.  Customers know this as well and ask for concessions.  When crazy prices from your competitors are thrown in your face, make sure the comparison is truly apples to apples.
  2. Request to fix pricing for a period of time. Inflation will come.  No one knows when but it will.  Be careful of fixing prices without having a price escalation clause.
  3. My personal favorite: our new terms. It takes a lot of chutzpah to write that paying in an extended time period and demanding a discount for doing so benefits your supplier.  I haven’t figured out the Excel calculation that shows I am better off when a customer unilaterally adjusts its terms from Net 30 days to 5% discount/50 days or net 75.  If someone can send me the spreadsheet that shows how I am better off agreeing to those terms, I’d appreciate it.

An old business axiom says, “You name the terms and I’ll name the price.”  Given the slow growth today, chances are you have competitors allowing customers to do both – name the terms and the prices.  Until growth improves, customers are going to use the leverage irrational competitors create.  Choose how and where you compete with caution.  Once margin is conceded, it’s hard to get it back.

 

Does Your Business Leverage All of Its Assets?

May 6th, 2015

 

I’ve always been fascinated by the differences, perceived and real, between business to business and business to consumer (B to B and B to C) approaches to sales and marketing.  Most B to B businesses aren’t that good at marketing.  Conversely, any B to C business that can’t get its message to customers usually isn’t around too long.  While it’s starting to change, we in the B to B world tend to move quite slowly when it comes to reaching our customers in unique and innovative ways.

I’m traveling on business and picked up my rental car.  I was surprised to see a key chain that offers a discount at a major retailer during the time of my rental. I’m sure the rental car company is getting some type of fee from the retailer for access to its customers.  It’s really not costing the rental car company much, maybe the labor in putting the key chains on. Yes, there’s some risk of being associated with a specific  retailer but every decision we make carries a risk.  If there’s no risk involved, you didn’t have a decision to make in the first place. I’d say the rental car company is leveraging its assets quite well.

I would submit that for most businesses and especially B to B businesses, their most valuable assets are their customer bases.  Are my printing presses really worth more than my competitors’?  As a result, businesses tend to be very protective of their customer bases.  In general, that mindset has served business well.  But we live in an ever changing world that is more connected every day.  This creates opportunities to do more for your customers.  You might not be able to keep all of the profit pool associated with whatever else you can do for your customers but you certainly should get something.  Economists have proven protectionism is bad for economic growth (politicians don’t get it).  It’s probably bad for business as well.

Low Growth BUT It’s Still Growth

April 29th, 2015

First quarter GDP numbers came out today and it wasn’t pretty.  The US economy grew at 0.2% in Q1 versus a 1% estimate.  These numbers will be revised several times but don’t expect anything great to come from the revisions.  The pundits are out in full force with the doomsayers focusing on how bad the numbers are and the optimists looking for the silver lining.  It is what it is: we’re in a low growth stage in the economy.   Growth has been anemic for a while.  Growth is certainly better than contraction.  Focus on the positive.  Focus on what you can control – your actions.

A little closer to home, Avery Dennison released its Q1 earnings today as well.  Reported sales were up 3% on an organic basis (removing currency from the equation).  While 3% growth isn’t exactly setting the world on fire, compared to the overall economy, it’s not too bad.  I’m sure Avery’s senior management will say that on their investor call and I know their sales team is saying the same thing to the senior management!  Of course, senior management is telling the sales team 3% isn’t good enough.  Call us hypocrites; that’s a prerequisite to be in senior management.

Growth isn’t easy.  A lot of companies (and people) got spoiled and when the economy was growing, they were growing and they took the credit for the growth.  Now that the economy continues to sluggishly meander along, they blame the economy for their slow growth.  Funny – sales people are hypocrites too!  Always remember – growth requires investment.  If your company wants to grow, it better be investing – equipment, people, training, software, etc.  If you want to grow, you better be investing – making extra phone calls, sharpening your skills, researching prospects, etc.  Doing what you’ve always done will keep you right where you are.  Yes, a rising tide lifts all boats. It lifts them all the same amount and those boats have no control over how high they get.  Is that how you want to manage your career?

 

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.