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.


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.