Remember Who Pays The Bills

April 1st, 2015

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

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

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

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

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

March 25th, 2015

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

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

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

Strange Times Lead to Strange Behaviors

March 18th, 2015

 

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

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

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

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

 

It’s Amazing What a Little Sunshine Can Do

March 11th, 2015

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

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

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

You Find What You’re Looking For

March 5th, 2015

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

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

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

Inflation: The Fat Lady is Warming Up

February 25th, 2015

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

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

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

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

? The Beauty of Competition

February 18th, 2015

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

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

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

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.