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. (

“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 ( ) 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


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.

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:

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
 • 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
 • 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

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 –, 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.


A Sobering Look at the Print Industry in the US

August 20th, 2014


The Printing Industries of America (PIA) produces some very useful economic information.  One of their recent reports highlights the contraction in the number of printing establishments in the US.  Over the last 9 years, almost 20% of printers have merged or closed down.  Over the same time period, the dollar value of print shipments has decreased by almost 25%.    It doesn’t take a rocket scientist to figure out sales are shrinking faster than the number of suppliers.  In other words, more competitors are chasing less business than 9 years ago.  In a competitive market, that means lower margins.

It’s not all doom and gloom.  The drop in print shipment dollars appears to have stabilized after a significant decrease during the recession.  Certain segments of print continue to do well.  NAICS 323 includes printing and related support activities (like packaging, labels, and signage).  NAICS 511 includes newspapers, periodicals, books, greeting cards, and directories.  What is interesting is NAICS 323 has seen its number of establishments decline significantly and has seen sales stabilize and even start to grow whereas NAICS 511 has not had a significant decline in the number of participants but has seen sales continue to drop precipitously.  Part of that is probably due to the local nature of the newspaper business but my hunch is a bigger part of this phenomenon is the sunk cost fallacy: the owners of large printing plants are in denial and think they’ll get their capital returned if they hang on a little longer.  The money is gone – it’s time to move on and rationalize overall capacity.

As Jim Collins so bluntly puts it, “It didn’t matter how bleak the situation or how stultifying their mediocrity, they all maintained unwavering faith that they would not just survive, but prevail as a great company. And yet, at the same time, they became relentlessly disciplined at confronting the most brutal facts of their current reality.” (Jim CollinsGood to Great: Why Some Companies Make the Leap… and Others Don’t; emphasis added). Do you confront the brutal facts of your current reality?


A Sobering Look at the Print Industry in the USA Sobering Look at the Print Industry in the US




Label Expo 2014: Convergence will be the Theme

August 13th, 2014

In less than a month, the label industry will overtake the Rosemont Convention Center for Label Expo.  Based on what I’ve seen in the marketing materials, I expect to hear and see a lot about the following developments:

  1. Hybrid presses.  Expect to see a lot of flexo/digital combination presses.  A wise colleague of mine said it reminds him of the hybrid presses of 20 years ago, which were flexo/offset combinations.  Digital has driven flexo to improve change over times and scrap for set ups.  We’ll see how far it’s come with major manufacturers touting their hybrid solutions.  Not too long ago, the flexo guys picked on digital’s quality.  Boy, has that tune changed!
  2. Flexible packaging on flexo presses.  Flexible packaging materials from what were traditionally laminate suppliers.  Labels and packaging are morphing into one product.  This trend plays on efficiency and sustainability initiatives.
  3. Sustainability initiatives.  We will hear more about thinner materials, sustainably manufactured products, linerless labels and applicators, and other improvements that improve our products’ sustainability characteristics.  We all hear thinner and instantly think cheaper.  We need to start thinking about differentiation and selling value.  Not easy to do and as an industry, we’re terrible at it.  Whoever figures it out will leapfrog their competitors.

All of these play on a theme that is very important to our industry: convergence.  I’ve written about this topic before.  It’s definitely here.  The biggest impact technology is having on the world is convergence – industries are converging, products are converging, and if your company isn’t adapting, you’re in trouble.  Lines are being blurred between products and functionality.  If a package can be produced with information on it that used to be found on a label, who needs the label?  Lines are being blurred between customers, suppliers, and competitors.  If you’re not adapting, someone will take your business away.  Trends are your friend if you recognize them and act.  Looking forward to seeing many of you in Chicago.


The Generation Gap: Be Kind, Please Rewind

August 5th, 2014


This past weekend, we decided to see what movies we could watch on demand via our cable company.  My wife and I reminisced about having to get in the car and drive to the video store.  I remarked about rewinding the video tape and the possibility of a fine if you didn’t rewind.  “Be Kind, Please Rewind” labels (not stickers) became popular on videotapes.  Our 8 year old son couldn’t comprehend what rewinding meant. “Dad, I don’t have to rewind on Netflix.  Why did you have to rewind a videotape?  What’s a videotape anyway?”  Apparently, a milestone birthday this year wasn’t enough to make me feel old; I had to explain VHS to my son.  Thankfully, the betamax discussion didn’t follow!

So what’s the point of all this?  This little interaction played on many themes I often pontificate about:

The generation gap has grown wider over the last two decades or so.  While I experienced some changes vs. my parents ( the end of the 8 track, cable tv developing as two examples), I didn’t have anywhere near the instant gratification/choices kids have today.  Those changes don’t apply to just entertainment.  They have an impact on how they approach work as well.  I don’t think Generation Y is happy with annual reviews.  They want to know where they stand all the time.

  1. I often lament the poor customer service that exists today.  Think about the message in “Be Kind, Please Rewind.” It’s a simple statement asking for courtesy.  With apps and on demand videos, a simple way to teach common courtesy is gone.  Courtesy is a fundamental building block for customer service.  Obviously, the end of the video tape hasn’t killed common courtesy.  But the less human interaction people have today certainly hasn’t helped.  Just 10 years ago, watching a movie required interaction.  First came Redbox, eliminating the person.  Next came streaming video.  Press a few buttons and you have your movie.  We wonder why communication skills are deteriorating.
  2. Think about all the businesses disrupted in this silly little example.  Just off the top of my head: real estate (no video stores), packaging (labels, video cased, store displays, etc.), repairmen, the list goes on.  Of course, other opportunities have arisen for programmers, data storage experts, etc.  The creative destruction of capitalism fosters new opportunities – that’s where we need to focus.

Technology is rapidly changing how we interact.  We are still social creatures.  As technology becomes ubiquitous and available to everyone, those with superior social skills will rise to the top.  Being kind is a good place to start.


The Noise Continues

July 30th, 2014

The Commerce Department released its first report of US Q2 GDP today.  The US economy grew at a 4% rate in Q2 according to this release.  This follows a 2.1% contraction in Q1.  Things weren’t that bad the first 3 months of the year and things aren’t that great right now.  The truth is somewhere in the middle.  If you average the numbers, we’re at an annual run rate of 2% GDP growth.  Certainly not great growth but it’s not a recession either.

What does it all mean?  Consider this information: business inventories contributed a substantial portion of the negative GDP result in Q1.  They reversed and contributed a positive portion to the Q2 number.  Higher inventory numbers contribute positively to GDP and is one of the reasons many economists are starting to question GDP as the best measure of the economy . If you talk to most business owners, they’d prefer less inventory to more inventory.  Building inventory consumes cash.  Inventory builds for 2 reasons: Things have slowed down and products aren’t selling as fast as anticipated and/or businesses expect things to pick up and want to have inventory on hand to sell when demand improves.  The naysayers are already warning of slower growth for the rest of the year, as the inventory build will need to be worked through.  The Pollyannas are saying the inventory build shows an increase in confidence in future demand.  My gut tells me we had an inventory build in Q2 for both reasons.  Certain products/industries have seen a slowdown and built inventory.  Other products/industries have seen things pick up and are preparing to meet demand.  We can see that within our business – we have certain product lines selling very well and others that have tailed off.

Keep in mind this GDP number will be revised several times over the next few weeks.  There will be lots of noise around each release.  Pockets of growth exist everywhere – focus on those and your business will grow faster than GDP.  Segments within the energy industry, food industry, and logistics industry are good places to start.