Did the Great Recession Permanently Scar Us?

October 29th, 2014

I had a great conversation with a friend at the recent TLMI Annual Meeting.  Of course, the “how’s business” question enters into the conversation relatively soon.  “Brian, we’re having a good year.  But it doesn’t feel like it.  Everyone’s on edge, everyone’s nervous, and no one’s happy.”  I responded, “You nailed it – things aren’t fantastic but they’re not bad either.  But everyone thinks things are bad.”  We continued our banter and it really got me thinking.  We’re all worried about what’s around the corner.  As I’ve written in the past, visibility has decreased dramatically in most industries.  The lack of visibility certainly has its challenges.  But are things that bad?  We’ve had price stability for the last 3 years or so.  Yes, I know there have been some raw material challenges and operating costs (especially health care costs) have risen.  But the last increase that made it through the value chain was in 2011.  That’s the longest we’ve gone in my time in the industry.  (Suppliers – don’t get any ideas just yet.  I know you “need” increases due to raw material cost increases.  It’s still a challenge due to my next point.)  Growth is not robust, but we have growth.  It’s certainly not 2009 out there.  Yet if you talk to the average person, he’d say we’re still in a recession.  Our government is dysfunctional but that is probably a good thing.  Look back in history – our most prosperous economic times come with a divided government in which neither party advances its agenda.  Yes, there is discord in the world but there’s always discord in the world – we just hear about it a lot more.

I’m not a Pollyanna.  As I wrote, things aren’t all rosy.  We do have to prepare for inflation – it’s coming.  I’m reading a great book – thank you @MattHlavin – titled “The Hard Thing about Hard Things: Building a Business When There are No Easy Answers” by Ben Horowitz (http://www.amazon.com/Hard-Thing-About-Things-Building/dp/0062273205/ref=sr_1_1?s=books&ie=UTF8&qid=1414583875&sr=1-1&keywords=ben+horowitz) (Note to IDI Team: this will be on the reading list soon.)  Ben takes a different approach to Jim Collins’ truism that part of a leader’s mission is to confront the brutal reality.  Ben thinks leaders tend to be too optimistic.  In general, I think he’s right.  But, as in the political arena and most of life, the pendulum swings too far one way or the other.  Take a step back and talk about the good things that have happened.  Not every meeting has to be about what went wrong and what you’re doing to fix it.  Have a meeting about the good things once in a while. I think the experiences of 2008 and 2009 have made everyone a little skittish and reluctant to acknowledge reality in a positive way.  You owe it to yourself and your team to confront reality.  Right now, reality isn’t all that bad.

 

Packaging Part II: We Need to Tell Our Story

October 22nd, 2014

Based on comments and feedback on last week’s post, it’s obvious I hit a nerve in discussing how packaging creates sustainability in other ways than just reducing packaging mass.  It’s somewhat timely.  I attended TLMI’s annual meeting last week.  Coincidentally (or prescient thanks to the conference chair and great business leader, Ingrid Brase), the conference centered around marketing.  One of the speakers asked the audience to rank our industry from 1 – 10 on marketing.  I think the consensus came out around a 3.  The good news is we’re honest about being horrible marketers.  The bad news is we are horrible marketers.  As Peter Drucker said and I’ve written before, there are two ways to grow a business:  marketing and innovating.  We’re pretty good as an industry in innovating.  We’re not good at telling the story.

I’ve been scratching my head at how we better tell our story.  I give our industry association, TLMI, credit for forming L.I.F.E. (Label Initiative For the Environment).  I.D. Images is L.I.F.E. certified.  We feel good about it and try to market it.  When I Google Project L.I.F.E, labels don’t show up on at least the first 3 pages – I gave up after that.  Obviously, the label industry isn’t doing a good job marketing what we’re doing.  (This is not an indictment on TLMI or TLMI’s marketing committee – there’s only so much that can be done by one organization that is driven by volunteer members. )  There’s FSC, SFI, SPC, and a whole laundry list of acronyms printers and packagers like to talk about.  Guess what?  They matter to us, not our customers and certainly not in the consumer world.  We need to try something different.  I think as an industry we can.

My friend, Rosalyn Bandy, Avery Dennison’s sustainability manager, responded to my blog last week.  Part of her comments were: “Recently, Coke, Colgate, Keurig – GMCR, J&J, P&G, Pepsi, Unilever, and Walmart all put money into a pool of funds called the Closed Loop Fund. This fund will provide no-interest loans to municipalities (up to $20MM) looking to increase/improve recycling infrastructure.  These companies are hitting the problem where it counts.  Our job in the label industry is to understand the impacts on recycling of the films, papers, labels and adhesives we produce and do our part to make these leading CPGs and retailers successful in their efforts. There is already enough plastic in the world for all time. We just need to recycle it.”  Note how traditional rivals are banding together to tell their story.
How about we do a similar thing and band together to MARKET the great things we’ve done for sustainability?  We need to keep in mind sustainability isn’t just reducing basis weight or recycling card board.  It’s reducing freight, reducing food waste, etc.    Of course, we’ll need to come up with a catchy acronym to name ourselves (sarcasm intended).  I think there’s an opportunity to band together and tell our story as an industry.  Collectively, we’ve done and continue to do great things.  We need to let people know.  If you are interested in joining me on this quest, let me know.  We’ll figure it out.

Don’t Be Fooled By Conventional Wisdom: Packaging is Growing (in Certain Areas)

October 15th, 2014

 

Here are 3 “facts” about packaging that have been beaten in our heads over the last few years:

  1. Consumers want less packaging.  They see packaging as wasteful.
  2. Corporations have environmental initiatives and want less packaging as well.
  3. E commerce is changing how goods are marketed and distributed and will result in less packaging.

Wrong, wrong, and wrong.  Do people want to pay less for packaging and throw less in a landfill? Of course.  Is it reality?  No.  I will use my applesauce example.  Our son likes applesauce.  We used to buy a jar of applesauce, he’d eat a few bites, we’d stick it in the refrigerator, and throw it out a few months later after it got shuffled around and forgotten about.  He discovered portable applesauce.  We now buy boxes of portable applesauce with individual sized servings in pouches.  We don’t waste applesauce anymore.  Oh, and guess what – we pay about 8 times more per ounce of applesauce in the portable pouch versus the rigid jar.  Do you think the CPG that makes the applesauce and the retailer that sells me that applesauce want less packaging?  Do you think it’s cheaper to pack and ship a box of portable applesauce in a nice rectangular box or an awkward shaped jar that requires packaging fill so it doesn’t roll around in a box if I order it online and have it shipped to my house?  Does my cost end up being about the same if I use the right measurement to compare, which is what I paid for the applesauce that is actually eaten?  It might not get to parity, but I know the jar always had a lot left when we finally disposed of it.  I would also submit the individualized and recyclable pouch is more environmentally friendly than we think: no dish to wash, no spoon to wash, and no shirt with applesauce all over it to wash after he’s done eating.

Of course, the guy selling the rigid container (plastic or glass) and the label to the applesauce manufacturer has a problem.  The guy that makes barrier films and the printer are quite happy.  The contract packager that fills those pouches is quite happy.  The trend towards individualized portions are changing the types of packaging used.  But packaging will always be necessary for marketing and product protection.  That’s not changing anytime soon.

 

If Technology Worked All The Time, There Would be a Lot Less Jobs

October 6th, 2014

My title came from a quotation I took from our head of IT at I.D. Images. (I often joke about the “IT Empire” he’s built – we’ve gone from 1 part time to almost 3 full time IT people over the last several years.) I’ve had an interesting few experiences with technology lately that have frustrated me.

A couple of weeks ago, I got a notice about an update for my IPad. Like a fool, I did the update. My device started to freeze on a regular basis. Finally, it completely froze and was inoperable. After consulting our IT department, who told me to shut it off, wait a minute, and turn it back on, I went online to look for a fix. (Amazing how the fix is shutting something off. I wish that worked for flexo presses. Yes, IT nerds, I know it has to do with temporary memory issues – that’s why shutting technology devices down works most of the time.) Here is what I got from Apple’s website. I took the screen shot out.

To put your device into recovery mode, follow these steps:
1. Turn off your device and leave it off.
2. Plug in your device’s USB cable to a computer with iTunes.
3. Hold down the Home button on your device as you connect the USB cable. Keep holding down the Home button until you see the Connect to iTunes screen.
4. When you see this screen, release the Home button. If you don’t see this screen, try steps 1 through 3 again.

I love the hold down the home button while I connect the USB cable. Should I stand on one foot too? I’ll bet if someone from Apple put that in the directions, people would do it. After successfully rebooting in recovery mode – caused by Apple’s update, I want to emphasize, I had what I thought was a working IPad. I found out a few days later, I could receive email but it wasn’t sending email. It didn’t save them anywhere – any email I sent just vanished. Of course, this is another known problem that Apple has a fix for – delete your account and re-add it. After figuring that out, I apparently have a functional device.

I also recently got a new cell phone. Yes, its most important function is being a phone to me, not texting, not emailing, not social networking. I want a PHONE. My phone (Samsung) was working well. I got a notice about an upgrade for my voicemail. Again, the fool that I am, I clicked OK. Apparently, I missed the “you must shut off and restart to activate this feature” notice because I went about a week without my voicemail working. I don’t know how I missed it. Oh, wait, that warning never came up. No Mom, I wasn’t ignoring your calls.

All of this leads me to my point: we have come to accept problems from technology. It’s kind of sad actually that if you search for “Frozen IPad,” 14.2 million hits come up. Rather than solve the problems, we have massive help desks. All technology help desk personnel went to the same school. No matter what company you call regarding a technology issue, the first question will be, “Have you tried turning it off and turning it back on?” In any world other than technology, that would be an unacceptable fix.

It’s the Economy, Stupid!

September 30th, 2014

 

As Bill Clinton prepares to run for a third term (oops), As Hillary Clinton “explores” a presidential run, expect to hear more commentary from them about solutions for our stagnant economy.  (Is Hillary really just exploring?  Who is she kidding?)   President Clinton recently chimed in about fixing wage growth. I’ve heard President Clinton speak in person and he has an amazing gift to connect with his audience which is what makes him who he is.  He also has an  gift to summarize an issue in a simple to understand but powerful sound byte, like the title I borrowed from him.

I pulled out part of President Clinton’s  comments from his recent interview.  You can read more here. ( http://www.cnbc.com/id/102036225)

“Median income hasn’t gone up for three reasons,” Clinton said. “One is the labor markets aren’t tight enough, and we haven’t raised the minimum wage as we should. And the second reason is we haven’t changed the job mix enough, to raise the median income and have more poor people working into it. The combination of jobs has to pay, on average, higher wages.”

Clinton said he believes the current business climate is also to blame for income stagnation.

“Gross domestic product growth doesn’t lead to growth in median incomes because company after company takes more of its profits and spends it on dividends, stock buybacks, management increases … and less on sharing it with the employees broadly,” said Clinton, who is hopeful that corporate America is poised to change that view.

While Clinton said he hopes that corporations refine their moral compass, he also hopes Washington will act when it comes to the debate over whether tax inversions—the practice of American companies reincorporating in foreign countries to take advantage of lower corporate tax rates—are right or wrong

“America has to face the fact that we have not reformed our corporate tax laws when 100 percent of the people, from Democrats, Republicans, Independents, agree we need to,” Clinton said. “We have the highest overall corporate tax rates in the world. We need tax reform.”

 

No matter what side you’re on, it’s hard to disagree with what he says simply because he basically says nothing.  I will translate:
1.  We need higher paying jobs to have median income go up.  Wow.  Insightful.  Master of the obvious.  He does say we need to raise the minimum wage, appealing to the masses.  Mr. President, I hate to be a stickler, but technically you are wrong.  The reality is raising the minimum wage will have no impact on median income.  Median income is the wage in the middle, meaning 50% of jobs pay less and 50% pay more.  If you raise the bottom or the top wage, it has no impact on the median.  Median is different than average (or mean).  Note to Republicans: you’re not going to win an argument about the minimum wage so punt.  Raising the minimum wage won’t make anyone’s lives better.  It will lead to some inflation, which helps solve our debt problem.

2.  “GDP growth doesn’t lead to growth in median incomes.”  Here’s where he gets political.  Corporate “evil doers” use the money as they see fit, investing in the business or returning funds to shareholders.  In the current environment, he’s right – they’ll buy back shares or reward shareholders.  That is done because the current economic (and political) climate does not justify reinvestment in the business.  It’s pretty simple: businesses are profit maximizers.  If a business can make more money by hiring more people, it will.  If it needs to raise wages to keep employees who help the business make money, it will.  If it gets a higher return by reducing its share count, it will.  I do love the author’s ending statement, “who is helpful that corporate America is poised to change that view.”  Corporate America does not have a “view” on sharing with employees.  Corporations respond to the environment they’re in.  It’s called CAPITALISM.  Capitalists allocate scarce resources in order to earn a profit.  If that changes, we’ve got a problem.

3.  We need corporate tax reform.  That’s an easy statement to make.  How about a plan?  Release a statement about cutting rates.  I’d be curious to see if the media would jump on how much it would “cost” the government if corporate taxes were lowered if the plan came from the Clinton camp.

It’s easy to romanticize how great things were in the Clinton and Reagan years.  As the election season heats up, prepare to be inundated with reports proving just how great things used to be.  We’ll also hear lots of people chime in on how to “fix” things.  One thing the Reagan and Clinton years had in common was the lowering of overall tax rates on business and investment.  That has changed over the last 14 years.  Capital is needed to create jobs.  If you want more jobs, make capital less expensive. Taxes aren’t the only cost on capital.  Regulations, as I’ve written in the past, are worse.  Encourage an environment that rewards risk and you will see jobs created and wages go up.

With Apologies to Tennyson: ‘Tis Better to Not Care at All Than Act Like You Do

September 24th, 2014

I recently got a letter from a clothing store thanking me for my patronage.  The letter was signed by the CEO and included a gift card to use “like cash in one of our stores or online.”  If I had any questions, the CEO included his “personal email address” that I could contact at any time.

Feeling like a valued customer, I went online to place an order, even though I really didn’t need anything.  I filled my online shopping cart and went to check out.  My code was invalid according to the clothing store’s website.  I tried it again, same result.  I called the 800 number on the website.  After waiting on hold for a while, I  finally spoke to a person in the company’s call center who had no interest in helping me.  (That’s why I shop online.  I find that theme all too common in retail stores and it drives me nuts.  I love when store employees see me coming and seemingly vanish into thin air.  I started to develop a complex thinking it was me but I have come to find that it is a common occurrence for employees to vanish in retail stores.)  She said the code wouldn’t work online; I had to place my order, download a form, and request a refund in order to get my “reward.”   I said, “That’s not what the card from your CEO says.”  She said, “It doesn’t matter what the card says; that’s the way it is.  Don’t blame me – I just work in the call center.”  Even more frustrated, I emailed the CEO.  I emailed him over a week ago and haven’t heard boo.  I know being the CEO of a major retailer means you’re a busy guy.  It’s not good to give out your email and not have even an intern respond.  Even a form letter would be nice.  If you aren’t responding, what do you think the rest of the organization is doing?  Needless to say, I canceled my order and will probably find a new store to grace with my fashion prowess (or lack thereof).

We live in an age of declining customer service and customer expectations.  We expect customer service to be poor.  Don’t make it worse by pretending like you are going to offer good service.  People know you don’t care; there’s no reason to remind them.  If you do care, make sure you follow through.  It’s really not that hard.

For those of you interested, here is the source poem (http://www.poetryfoundation.org/poem/174603 ) that I used in my title.  I’ll bet it brings back fond memories of high school English!

In Memoriam A. H. H. OBIIT MDCCCXXXIII: 27

BY ALFRED, LORD TENNYSON

I envy not in any moods

The captive void of noble rage,

The linnet born within the cage,

That never knew the summer woods:

 

I envy not the beast that takes

His license in the field of time,

Unfetter’d by the sense of crime,

To whom a conscience never wakes;

 

Nor, what may count itself as blest,

The heart that never plighted troth

But stagnates in the weeds of sloth;

Nor any want-begotten rest.

 

I hold it true, whate’er befall;

I feel it, when I sorrow most;

‘Tis better to have loved and lost

Than never to have loved at all.

Label Expo Recap

September 16th, 2014

As expected, the theme of convergence played out.  Many “traditional” flexo manufacturers displayed presses with digital capabilities.  Many digital companies touted modules that can be added to flexo presses.  Traditional laminate suppliers had flexible packaging options at their booths.  One part of this trend that I’ve written about before is the equipment changes will drive consolidation at the converter end more than any other factor.  To really play in the high end label market requires close to a seven figure investment.  Yes, there are less expensive digital options coming to market constantly.  It will be a long time before their quality and efficiency catches up to the market leaders.   As substrates become thinner and customer demands become greater, the 35 year old flexo press ain’t gonna cut it.

Of course, the buzz of the show was around Bemis’s sale of MACtac to a private equity firm.  In some respects, that sale flies in the face of my convergence theme.  Bemis is a leading provider of flexible packaging.  It sold its label and graphics business.  Certainly Bemis’s management team and board have a strategy for their business.  It’s pretty clear it doesn’t involve pressure sensitive labels.  I would argue they made that decision years ago – they had MACtac sold in 2003 after all.  They haven’t made investing in MACtac a priority.  There are also less synergies  in the value chain for an extruder and a laminator than there further down the chain in the decorating end.  However, don’t be surprised if a major flexible packaging player buys a laminator or vice versa.  People are going to look for ways to push the value chain in their favor.  Upstream and downstream integration are two ways to try.

It’s going to be an exciting next few years in our industry.  Buckle your seatbelts! On a lighter and more personal note, it was great to see so many friends in Chicago.  I got an interesting comment from a bartender one night, “We get a lot of groups here that like to have fun.  You guys like to have fun and it’s clear you all like each other.”  She didn’t get my irony when I replied, “We’re stuck in this industry!”

MACtac Sold To Private Equity: The Trend Continues

September 9th, 2014

On Monday, Bemis announced it reached an agreement to sell MACtac to Platinum Equity.  Platinum is a very successful private equity firm that has done wonderfully buying businesses from large corporations.  I expect they will have great success with MACtac.

Private equity continues to like packaging businesses.  (Remember, labels are a packaging product.)  In general, businesses like MACtac have characteristics private equity loves: stable cash flows, low risk of disruption from technology, and an ability to scale quickly.  Stable cash flows support debt, increasing the return on equity. Labels aren’t going to be obsolete tomorrow, maybe in a few decades, but Platinum will be long out of this investment by then.   Don’t be surprised if Platinum adds to MACtac via acquisitions.  As our industry matures, consolidation will continue to be a strategy employed by the remaining players.  Consolidation will ultimately make the industry healthier.

I did a little research (emphasis on little).  It’s amazing how the world has changed.  In 2002, UPM Raflatac agreed to acquire MACtac for $420 million.  The transaction was challenged by the Department of Justice and ultimately fell through.  Platinum bought MACtac for $170 million.  If you’re bored or nerdy like me, you can read a redacted version of the US District Court judge’s opinion blocking the deal.  Despite what we think, assets don’t always increase in value.  Remember that as you contemplate the future of your business and portfolio.

 

http://www.justice.gov/atr/cases/f201100/201196.htm

Costs of Employees: Why Job Growth Remains Stagnant

September 3rd, 2014

 

 

I regularly read Ron Muhulenkamp’s commentary on the economy and investing.  Ron is quite outspoken about what drives economic growth.  Below is an excerpt from his recent newsletter.  The full text is available at:

http://www.muhlenkamp.com/investment/memorandum/issue_111#section_3

His analysis demonstrates how much more an employee costs his business today vs. in 1996.  While I haven’t compiled the figures for I.D. Images, I am pretty sure they are similar.  We do not offer a pension plan, but do match 401k contributions.

Remember Econ 101 – all other things equal (the economists’ favorite phrase, ceteris paribus), we want less of something as it costs more.  As it costs employers more to hire an employee, they will seek alternatives to hiring.  For example, automation becomes more attractive than hiring as the cost of an employee – capital becomes cheaper relative to labor.

Brian’s Summary of Employee Wage, Take Home Pay, and Cost at Muhlenkamp & Company

  1996  -2006 2006 – 2014 1996 – 2014
Increase in Employee’s Gross  Wage 11.1% 12.5% 25%
Increase in Employee’s Take Home Pay 15.3% 12.9% 30%
Increase in Employee’s Cost to Company 28.7% 23.1% 58.3%

 

Note the dramatic increase in the Employee’s Cost to the Company.  If our politicians were serious about job growth, they’d lower the costs associated with hiring.  The costs of an employee have skyrocketed over the last 18 years.  This has a lot to do with the lack of job growth we’re experiencing.   It’s not that complicated.

Employment costs at Muhlenkamp & Company for 1996, 2006, and 2014

Employment Costs (W-2: Married Filing Jointly; No Dependents)

Employee’s Deduction  January 1996 January 2006  January 2014
Gross Wage1 $36,000.00  $40,000.00 $45,000.00
FICA      
 • Social Security (6.2%)      
 • Medicare (1.45%)  2,754.00  3,060.00  3,442.50
Federal Withholding 3,626.00 2,714.00  2861.00
PA State Withholding 1,008.00 1,228.00 1,400.00
PA State Unemployment 10.80 36.00 31.50
Occupational Tax  10.00 10.00 N/A
Local Services Tax N/A N/A 5 2.00
Local Earned Income Tax 360.00 400.00 450.00
Employee’s Take-Home Pay $28,231.20 $32,552.00 $36,763.00

 

Employer’s Costs

Gross Wage1 $36,000.00  $40,000.00 $45,000.00
FICA      
 • Social Security (6.2%)      
 • Medicare (1.45%) 2,754.00 3,060.00 3,442.50
Health Insurance 4,207.32 13,765.20 22,264.00
PA State Unemployment 167.52 266.94 557.76
Federal Unemployment     43.00
Employee’s Cost to Company $43,128.84  $57,092.14 $71,307.26
Pension/Profit Sharing Contribution2 9,000.00 10,000.00 11,250.00
Employee’s Cost to Company  $52,128.84  $67,092.14  $82,557.26
     
Employee Cost: Employee Take-Home      
Pay (Pre-Profit Sharing) 1.53 1.75 1.94
Employee Cost: Employee Take-Home      
Pay (Post-Profit Sharing) 1.85 2.06 2.25*

 

The first table shows the W-2 numbers for a person’s gross income and take-home pay. This is what “employment” looks like to the employee. The second table shows the amounts paid by the employer for FICA and health insurance, various unemployment taxes, etc., which most employees don’t see. In 2014, for the employee to take home $36,763.00, it costs the employer $71,307.26 or $82,557.26 with a pension/profit sharing contribution. This is what “employment” looks like to an employer.

* Specifically, for my son to take home $1.00, it costs me (his employer), $2.25, so he must produce $2.50. The 25 cents is my return for hiring him. (In fact, the average profit-payroll ratio in the U.S. economy is 10%-11%.) If you tax (or regulate) away the 25 cents, none of this happens. (To learn more, read The Trouble with Government Spending by Ron Muhlenkamp, available at www.muhlenkamp.com.)

Copyright 2014 Muhlenkamp & Company, Inc. All Rights Reserved.

1 Based on the U.S. median income.

2 Based on maximum allowable by law: 25% of gross wages.

 

Jeff Bezos: Someone Who Gets It

August 27th, 2014

I was driving to work this morning and flipped the radio to CNBC (yes, I’m a business nerd). I’m glad I did. One of the guests was talking about why Amazon has succeeded in the internet shopping arena where several others have failed. The host mentioned a bunch of failed internet businesses – pets.com, Webvan, etc. The guest replied, “Jeff Bezos and Amazon aren’t in the internet shopping business; they’re in the customer service business. Everything Amazon does is centered around the customer.”

That statement sums up why Amazon gets a valuation premium vs. other retailers and internet companies. Amazon has expanded from a book seller to sell virtually any product and a lot of services. They’ve been able to enter new markets because they’ve built trust with their customers. I had one “bad” experience with Amazon. My first Kindle went black after I’d had it for less than a few months. Amazon replaced it within 48 hours of me notifying them about the issue. Guess what? When my wife needed a new device, a Kindle was the choice. The phrase turning lemons into lemonade doesn’t do how Amazon handles issues justice. I’ve blogged about Bezos before and if you haven’t read “The Everything Store,” you should pick it up immediately.

World class customer service isn’t easy. To accomplish it, you must be world class in your operations. It’s a constant battle to get better and fix issues no matter what your business is. To survive, you must be improving how you do things. But to thrive in the hyper-competitive, instant gratification world we live in today, you must layer world class service on top of your operations. Despite all of our technological advances, people still buy from people and businesses they trust. That will never change.