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.


Maturing Industries: A Playbook

July 23rd, 2014


Mesirow Financial is one of the leading firms involved in packaging mergers and acquisitions.  If you are in the packaging space and want to know what is happening, I encourage you to sign up for their email updates.  Their latest update lays out what happens in mature industries.  Rather than cut and paste their graphs, I have a full link to the report below.  I encourage you to read it.

In a nutshell, they paint the picture of what happened in the US corrugated industry over the last 7 years.  Volume got trounced  during the recession. From its peak in 2007, it was down almost 13% in 2009.  In 2003,   corrugate volume still wasn’t back to where it was in 2007, down by almost 9% from the 2007 peak.  Market share of the top 4 players has increased from 58% in 2007 to 70% in 2013.  Despite the volume set back, the major players have increased their EBITDA margins.  In particular, International Paper’s North American Industrial Packaging EBITDA margin has increased from 14% in 2007 to 22% in 2013.  I’m sure many people in the label industry would kill for the starting EBITDA margin!

In an industry showing tepid growth, the major players have increased margins by ringing out efficiency gains.  We’re seeing that with the big consolidators in the label industry.  We’ll continue to see it across our supply chains and in the smaller side of the label business.  The reasons are explained in more detail in the attached report.  Thanks to Bill Hornell and the Mesirow team for this week’s blog fodder!



Maybe Someone Will Start to Listen About Regulations  

July 15th, 2014

I’ve written many times about the obstacles businesses face in today’s environment.  Over the last few years, it seems that all politicians have focused their talking points about business on taxes.  The right blames high taxes for all of businesses struggles and the resulting lackluster job creation environment.  The left claims we can solve our fiscal woes and improve the living standards of a substantial portion of our population by raising taxes and “spreading the wealth around.”  Both take extreme positions and after a while, it’s hard to think anything matters other than taxes.  Yes, taxes matter, but not to the extreme either side would like us to believe.

The real issue is the increase in regulations and bureaucratic red tape that has occurred over the last couple of decades.  Federal, state, and local regulations have real costs associated with them.  These costs – both hard dollar costs and soft costs such as time – take away from what a business should do: service its customers.  The Economist recently published an article that hit home (link below) about this very point.  Small businesses, unquestionably the job creation engine in this country, worry more about regulations than taxes.  I hope elected officials read this article.  I especially hope elected officials in the states we do business (OH, IL, NC, CA, CT) read this article. The venues we choose to do business in certainly don’t score well in this analysis.  Our top rated state, North Carolina, comes in with a strong C+ rating.  The listing of Connecticut as a state we do business in illustrates my point of regulations being the main issue.  We have a sales person that lives in Connecticut.  As a result, we have to register as an employer.  We are required to carry workers’ compensation insurance in Connecticut on him.  One employee, whose main job risk is dropping his phone on his foot, requires several hours of compliance work by  our staff and outside advisors (accountants and lawyers).  Oh, and a workers’ comp premium with a rate that is obscene.  Yes, we chose to go this route and hire someone who lives in CT.  I don’t regret that decision.  But, we haven’t done it again in other states.  The rise of the 1099 employee (independent contractors) is a direct result of burdensome regulations.

If you want jobs, make it easy to create jobs.  Once we cross that bridge, we can argue about taxes and what “fair” means.


PS Special thanks to a great long time friend who sent this article to me.  He experiences the regulatory burden everyday in his career as an equity option trader.


Remember These Two Critical Lessons

July 9th, 2014

At a cookout over the weekend, I ran into a friend that is a professor at a local business school.  A few years ago, he had some MBA students complete a project at I.D. Images.  He told me he often uses two of my lines with his students.  After making sure the heat and alcohol had not impacted his judgment, we had a great conversation about business and life.  He reminded me of what I said and continue to say over and over.  It’s so important it’s worth repeating here again.  (I’m sure I’ve written some variation of this in the past.  Like a good comedian, I recycle my best material.)

My two lessons came from business school.  I attended the University of Chicago Booth School of Business. (It wasn’t called Booth at the time but a $300 million gift goes a long way in this world).  It was a great experience.  I learned a lot and made some great friends.  I can boil the learning down to 2 points.  With sincere gratitude to Professor Steve Kaplan and the other great faculty at Booth, here they are:

  1. Options, meaning choices, are valuable.  It’s not easy to figure out the value, but they have value.
  2. CIMITYM: Cashflow Is More Important Than Your Mother.  Sorry Mom.  Sorry Kelly – I am teaching Logan this lesson!

There you have it.  If you haven’t gone to business school, I accept cash in small bills.  No need to contribute to the student debt problem – pay me what you can.

I think about these lessons constantly as we look to grow our business.  A piece of equipment is much more valuable if it can service multiple product lines, for example.  Improving cashflow is my top priority every year.  If you want to impress a business school professor, say these mantras with confidence.  It worked for me.


A Simple Request: Please Read the Declaration of Independence This Weekend

July 2nd, 2014

Two hundred thirty eight years ago, 56 brave souls changed the world.  While you’re enjoying a burger, please take the time to read the document they signed.  I copied the first two paragraphs here and a link to the entire Declaration of Independence is below.

Have a wonderful holiday.

The Declaration of Independence

When in the Course of human events, it becomes necessary for one people to dissolve the political bands which have connected them with another, and to assume among the powers of the earth, the separate and equal station to which the Laws of Nature and of Nature’s God entitle them, a decent respect to the opinions of mankind requires that they should declare the causes which impel them to the separation.

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.–That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, –That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness. Prudence, indeed, will dictate that Governments long established should not be changed for light and transient causes; and accordingly all experience hath shewn, that mankind are more disposed to suffer, while evils are sufferable, than to right themselves by abolishing the forms to which they are accustomed. But when a long train of abuses and usurpations, pursuing invariably the same Object evinces a design to reduce them under absolute Despotism, it is their right, it is their duty, to throw off such Government, and to provide new Guards for their future security.–Such has been the patient sufferance of these Colonies; and such is now the necessity which constrains them to alter their former Systems of Government. The history of the present King of Great Britain is a history of repeated injuries and usurpations, all having in direct object the establishment of an absolute Tyranny over these States. To prove this, let Facts be submitted to a candid world.

Xpedx – Unisource Merger: Almost Official

June 25th, 2014

In January, Xpedx and Unisource announced plans to merge their operations. By all indications, the merger will be finalized July 1. The new company, named Veritiv, will be based in Atlanta. (from The name Veritiv comes from the roots of three words: “verity”, meaning true, and “active” and “connective”. Common stock of the new company is expected to trade on the New York Stock Exchange under the symbol VRTV. In my next life, I am going to be a consultant specializing in naming companies. With a few drinks or a quick trip to Colorado, I could combine words like that.)

Veritiv will have approximately $10 billion in revenue with a focus on packaging, print, and facility solutions. There aren’t too many $10 billion companies in the packaging arena. Certainly, the sheer size of the new company will be a great strength. Buying power, technological capabilities and sheer reach all come with size. Size, however, is also a potential weakness. Response time and ability to react quickly can suffer. Additionally, it takes a lot more to “move the needle” for a $10 billion business than a $10 million business. Can a $10 billion business profitably serve a $50,000 account?

As I’ve written in the past, expect a lot more consolidation along the entire value chain. It’s hard for a small supplier to meet the needs of a large company like Veritiv. It will also be hard for a small competitors to outmuscle Veritiv in large accounts. Conversely, the definition of a large account is probably going to change at Veritiv, creating opportunities. The packaging industry is experiencing what most mature industries in the US have experienced. The competitive landscape will end up like a barbell – lots of small players on one end, very few mid-sized companies in the middle, and a handful of large companies on the other end. Small companies compete with service and speed. Large companies compete with resources and scale. Expect several small players to be born out of the Xpedx-Unisource merger.

The Government Wants Inflation and Why Interest Rates Might Stay Low

June 18th, 2014

A recent release showed inflation increased more in May than the experts predicted. The Consumer Price Index (CPI) increased 0.4% in May, surpassing the 0.2% increase anticipated by economists.

Time for a little trip back to Economics 101. Who benefits when prices go up, making a dollar less valuable? Borrowers. If I borrow $1,000 from you today and promise to pay you back $1,100 in one year, I am paying you a nominal interest rate of 10%. If inflation is 5% over that year, I am paying you back in less valuable dollars – the purchasing power of a dollar has eroded by 5% due to inflation. For example, if gas is $1.00 per gallon, one dollar buys one gallon. If gas is $1.05 per gallon, one dollar only buys 0.952 gallons of gas. That’s inflation at work. (On a side note, remember when a certain Republican president with friends in the oil industry got blamed for high gas prices? Has any complained lately about $4 a gallon gas? Hmmm.)

So, guess who’s the biggest borrower of all time? Our beloved United States Government. As of this morning, a quick look at the US National Debt Clock ( shows the government owes approximately $17.5 TRILLION to its creditors. I did a little more snooping. According to the Treasury, we, the tax payers, are paying a blended rate of 2.427% on that debt. ( ) Because these numbers are so big, I am going to show my work.

Current annual interest payments by the taxpayers, I mean US Government: $17,500,000,000,000 * 0.02427 = $424,725,000,000 ($424.7 Billion)

Let’s say interest rates go up 1%. New annual interest payment = $17,500,000,000,000 * 0.03427 = $599,725,000,000 ($599.7 Billion)

So a 1% increase in interest rates means we pay an additional $175 BILLION in interest every year. With federal tax revenues hovering around $3 trillion per year, a 1% increase in interest rates takes 5.8% away from other government programs (or to keep other spending constant, the government just adds to our debt). We can also expect higher taxes for everyone to pay for all of this, but that’s a topic for another day. Back to the inflation side. If inflation is 3% and interest rates stay at 2.427%, guess what? The purchasing power of our $17.5 trillion in debt decreases by $525 Billion. To look at it another way, the government benefits by approximately $100 Billion by borrowing in inflationary times and keeping interest rates low.

I know the real economists will destroy my analysis. Rates are fixed on most of the debt, so the increase won’t happen in a year. I also assumed the debt would stay constant. It’s not – it’s going up by the minute. The point of my analysis is keeping rates low while inflation increases helps the US out of our fiscal mess. (It also helps Japan a lot too, another country with a lot of debt and slow growth. Abenomics is based upon creating inflation.)

What does it all mean? US businesses and consumers, spooked by the Great Recession, have de-levered a lot over the last 4 years. We’re slowly taking on more debt, and we should. The government is going to help us pay that debt back with less valuable dollars. If you are on a fixed income, I am sorry. You will continue to suffer as your purchasing power gets eroded.

4 trends that will shape the NEAR future of the packaging industry

June 11th, 2014

I love this time of the year. The weather has turned and the days are long. One of my favorite things to do right now is mowing the lawn. It’s still early enough in the year that I’m not sick of doing it. I joke with my wife that I enjoy mowing the lawn primarily because it is time I am completely left alone. It is amazing how quickly a boy can disappear when he sees his dad pick up the dog waste bags. For the hour or so I clean the yard and cut the grass, no one and nothing bothers me. No headphones, no cell phone just the noise of a lawnmower and my brain thinking. I don’t know which is louder.

So last night, as the lawnmower roared, I got to thinking about what will happen in the packaging industry soon. So, here it goes:

1. Sustainability is real. The US is behind the world in packaging sustainability. We will be forced to catch up by rising costs and rising regulation. The changes will be radical – linerless labels, reductions in overall packaging used, and changes in how we buy will revolutionize packaging. All of the talk about recycling liner – just get rid of it! (Call us if you want to do that.) Think of buying a toy online – does that toy need primary plastic packaging? The display isn’t selling the product like it does in a store. If I were in the protective plastic packaging business, I’d look at CD case demand as a proxy for future demand for my products.
2. Electronics will reshape the industry. To some extent, they already have. We all know about digital printing. I would submit servo technology has had a bigger impact on our world than digital printing. We can run thinner substrates with more precision. Electronic labeling/packaging will come. Think about what that does for security labeling/packaging, shelf marking, freshness, etc.
3. Flexible packaging will continue to grow. The convenience/single serve revolution will continue to grow. See #1 and #2 – sustainable flexible packaging is the future. Inexpensive digital sensors will revolutionize food packaging.
4. Consolidation will occur all over the value chain. Packaging as a whole will grow with GDP. New technologies will take share from old technologies. Companies will face tremendous pressure to keep margins where they have historically been. Consolidation will drive out costs in mature technologies. Expect suppliers to move downstream (buying customers) and customers to move upstream (buying suppliers). Mature segments will see mergers. Look at the Xpedx/Unisource deal. It’s not about revenue; it’s about cutting costs. Scale allows that to happen. As I’ve pontificated many times, labels are a packaging product. If you own/operate/work for a “label converter” that doesn’t believe that, I’d recommend you look for a job – soon.

Disruption creates opportunities. There will be lots of both over the next few years in the packaging world.

Weaving Together the Last Few Weeks: Inflation, Kids’ Sports, and School

June 4th, 2014

I’ve gotten a lot of feedback on the posts over the last few weeks – thank you. I’m going to try to weave the last few weeks together. Bear with me if I ramble.

I started out with a post about kids getting to decide what we did in baseball practice and related that to management teams challenging their staffs to get better. Last week, I wrote about inflation and how to prepare. I had breakfast with a friend yesterday who has young kids. Our conversation got me thinking. We both played sports as kids and both played in college, so I’d say we were pretty successful athletes. Neither of us was subject to what our kids are subject to today. We played a sport a season and spent a lot of time outside playing with the neighborhood kids various sports and other activities. Kids are shuttled from organized activity to organized activity, sport to sport. 6 year olds can play “travel” sports! Seriously? Is travel soccer at the age of 6 really necessary? We all have this fear that if we leave our kids out of a sport, they’ll fall behind. Will they?

All of these kids “sports” have turned into a lucrative business for multiple stakeholders: cities rent their fields out, sporting good stores sell more stuff, sport specific camps pop up, coaches and trainers offer their services. That’s where inflation comes in: we pay for all this stuff. I’m convinced a kid is good enough for travel whatever, soccer, hockey, baseball, etc., at a young age if the parents agree to raise/pony up a certain amount of money. We talk about how expensive it is to raise children (it is). We self-inflict some of the damage. We do the same in business – we add costs in various ways. Does the latest and greatest software really provide an ROI? Or do we put it in because everyone has it? Just because you can doesn’t mean you should.

(By the way, I’m all for a kid spending time in sports if it’s what the child wants to do. Sports teach great lessons. However, when I see some of these kids, I often wonder if they’re having fun. Based on conversations, I’m certain most of the parents are miserable.)

Since we’re in graduation season, I feel obliged to tie this to school. Imagine what our society would be like if parents had kids spend a minor fraction of the time they spend on sports on say, math, English, and science. What if we had travel math leagues? Would the US be low in the world rankings for academics? It’s a sad world that we worry about kids falling behind in playing soccer and are willing to drive hundreds of miles for a soccer tournament but can’t find the time to teach our kids how to do math.

Inflation: It’s Coming

May 28th, 2014

Lately, a lot of attention has been focused on income inequality in the US.  It is not uncommon to read an article or hear a pundit talking about real wages being stagnant for the middle class over the last decade.  In other words, wage increases have been less than inflation.  Most of these discussions center on wage increases being too low relative to the productivity increases economists measure.  Maybe it’s time to change the conversation to the other side of the equation: inflation.

 Below are two graphs.  One represents the last six months of commodity prices; the other represents the last six months of US money supply.  Commodities are going up.  Let’s go back to Economics 101:  supply and demand.  Clearly, demand remains relatively flat in the world economy.  US Q1 GDP was negative.  China has slowed down.  Europe appears to be recovering, albeit at a snail’s pace.  So we turn to the supply side of the equation.  Some weather disruptions certainly contributed to the increases in commodity prices year to date.  A much larger contributor, however is the growth in money supply.  The second chart is the US M0 money supply growth for 2014.  A little math shows it’s increased a little more than 6% YTD.  Funny, commodities have increased about 8% year to date (the six month chart started in December).  I don’t have a PhD in economics and my simplified math would embarrass my business school professors, but it’s pretty clear to me that a majority of the increase in commodity prices is driven by the increase in money supply.  As long as the Federal Reserve keeps monetary policy loose, expect commodities to go up.  As long as demand remains stagnant, expect wages to remain relatively stagnant.  What does it mean?  More of the same: consumers’ purchasing power will continue to decrease.

 What does this mean for those of us hawking sticky paper?

  1. Disgruntled employees who see their costs go up faster than their wages.  Health care, food, and gas – three things we all buy – will continue to go up.  We don’t have pricing power to increase our prices.  With demand stagnant as well, it’s tough to raise wages to compensate for cost of living increases.  Meanwhile, in the convoluted way the government reports inflation (ex food and energy), the headlines will show “tame” inflation.
  2. See the “tame” inflation comment.  As I’ve written a lot in the past, it’s tough to raise prices when the government is telling our customers there’s no inflation.  We all know the truth, but the headlines don’t help our argument.
  3. Sooner or later, the dam will burst and raw material costs will go up.  A good vendor friend told me they need a price increase because of the raw material increases they’ve seen.  After I got done laughing at him, he admitted it’s going to be a tough task to get one through in the near future.  It will happen, but not until demand picks up (unless a major world event shocks the economic system, which could very well happen).  My guess is it might be late this year or early next year.

What should you do?

  1. Employees: Honesty is the best policy.  Share data.
  2. Customers: Continue to keep them abreast of costs as well.  They face the same pressures we do.  They won’t like it but they’ll understand.
  3. Prepare for cost increases.  They’re coming.

DJ – AIG Commodity Index as of May 27, 2014


6 Month Graph

Inflation: Its Coming

Inflation: Its Coming