The Dog Days Are Here.  What Else Will Come Sooner than Everyone Expects?

June 18th, 2018

As we lounged around the pool on Father’s Day, my wife and I discussed how it seemed more like late July or early August weather than mid-June weather.  The temperature pushed ninety degrees and the humidity was not far behind.  After a cold spring, the warm weather feels great but it got me thinking about what else could come sooner than we think.  Being a nerd, my thoughts went to the economy.

Economic growth is up.  Employment is up.  The Federal Reserve is projecting growth for at least the next two years.  All are positive signs, pointing to a rosy economic outlook for the next few years.

As I’ve written ad nauseam, costs are going up.  Raw materials are up.  Freight costs are up significantly.  Wages are starting to creep up.  The cost of borrowing, while still below historic norms, is rising.  The aforementioned Federal Reserve has indicated it foresees raising interest rates significantly over the next two years.  And there’s the little matter of a potential trade war.  All of these factors have the potential to derail economic growth.  Put them together and they’re a recipe for a recession.

Most economic forecasters predict we’re at least two years away from a slowdown.  A vast majority of these same experts missed the Great Recession (as did yours truly).  I don’t like being negative, but if I could make a wager, I’d bet the under on a slowdown starting before the experts think it will.  It might not be bad (and, barring any crazy political maneuvers, will be much less painful than the Great Recession) but a majority of businesses will feel a slowdown in the next six to twelve months.  Prepare.

The Cost of Healthcare Continues to Rise

June 11th, 2018

About a month ago, our soon-to-be-teenage son flipped over the handle bars of his bike and required an emergency visit.  (He was not supposed to be riding his bike but the inability of a boy to listen will be the subject of many future blogs).  The nurse asked him if he would like ibuprofen for his pain.  I jokingly but prophetically asked, “Should I go to the pharmacy across the street and buy it myself?”  She laughed and brought him medication.

The bills have come in.  The ibuprofen dose cost $23.50.  At the store this week, I discovered I could buy a bottle of branded ibuprofen with 100 doses for $4.99.  The really disturbing part is that the X-ray of his wrist cost only $29!  The follow up visits (yes, 2 visits) to an orthopedic doctor cost $60.00.  On top of all this, I paid $300 just to step in the emergency room.  I haven’t even added in my health insurance premiums.  Is it just me or are these amounts a little whacky?   I’m sure the consultants that figured out how to maximize revenue-per-patient-visit cost significantly more than all of the treatment he received.    (If you’re wondering, he severely sprained his wrist and had some scrapes and bruises.)

Right wingers will argue the medicine costs so much because of malpractice insurance and the cost of a potential lawsuit if something had gone horrible wrong.  They would also cite government price controls through Medicare and Medicaid inflate prices for the private sector.  My left wing friends would say, “This is why we need the government to provide healthcare to everyone,” conveniently leaving out how to pay for it.  (For all my friends in the healthcare profession who want universal healthcare, be careful of what you wish for.  A big reason healthcare costs are more in the US than everywhere else in the world is our medical care professionals are much more highly compensated than they are in other countries.  I will also remind them everyone country with universal healthcare has a VAT tax, the most regressive tax politicians have been clever enough to devise).

I relay all of this fun information because healthcare inflation continues to impact our economy.  It’s a real cost for businesses and individuals.  Obamacare did not help “bend the cost curve” as was promised.  My Republican friends have brought nothing to the table despite campaigning about changing things.  Unless healthcare costs are reigned in, we are headed towards major challenges in our economy.

What Has Changed in 50 years?

June 5th, 2018

Fifty years ago today, Robert Kennedy was shot in California.  He died the next day.

Exactly two months prior to that fateful day, he was in Cleveland to give what was supposed to be a campaign speech.  Martin Luther King had been shot the day before.  Rather than give a campaign speech, Kennedy gave what is considered one of his greatest speeches, focusing on the absurdity of violence.  A link to the full audio and text of the speech is below.  Do yourself a favor and read it or listen to it.  Better yet, listen to it with your kids.

http://www.americanrhetoric.com/speeches/rfkclevelandcityclub.htm

The following paragraph from his speech is as applicable today as it was fifty years ago.

“Yet we seemingly tolerate a rising level of violence that ignores our common humanity and our claims to civilization alike. We calmly accept newspaper reports of civilian slaughter in far off lands. We glorify killing on movie and television screens and we call it entertainment. We make it easier for men of all shades of sanity to acquire weapons and ammunition that they desire.”

It’s time for some grownups to step up in our government and engage in thoughtful dialogue about the epidemic of violence that plagues this country.  If a business was as ineffective as our elected officials at solving problems, it would cease to exist.  If we don’t want another summer of discontent like 1968, it’s time to start solving problems.  Or maybe it’s time to vote against every incumbent politician.

Good Things Happen When You Run

May 29th, 2018

My beloved Cleveland Indians are off to a tough start this year.  Fortunately, they’re in the worst division in baseball so their mediocre record has them in first place.

On Memorial Day, the Indians trailed the White Sox 5-2 in the fifth.  They loaded the bases with one out and the heart of their lineup due to bat.  Jose Ramirez popped up on the first pitch.  Edwin Encarnacion hit a pop up down the right field line.  He slammed his bat down in disgust.  It looked like a routine play.  The ball drifted a bit as three White Sox fielders ran towards it.  It ended up in no-man’s land and glanced off the White Sox outfielder’s glove, resulting in a three-run double that tied the game.  The Indians went on to win the game, 9 – 6.

A replay showed the Indians third base coach screaming to the baserunners, “RUN!  RUN!  RUN!”  He was also jumping up and down and waving his arms.  It would have been easy for the runners to jog, as they thought the final out of the inning was made.  Fortunately, they all ran and all scored.  Had they not, the outcome of the game might have changed.

You’ve got to run.  Pick up the phone and call a customer.  Call a prospect.  Do something.  It’s easy to get stuck in reactive mode.  If you want to change your outcome, work harder.  Good things happen to those that hustle.

The Pricing Games, Part II

May 22nd, 2018

As expected, the pressure sensitive label industry followed Avery Dennison’s price increase announcement.  The cynic in me says a few of them just cut and pasted the exact same announcement.  I wonder if Paul Manafort was involved!

It is certainly an interesting time.  For whatever reason, the label industry is reluctant to raise prices.  Prices only go up when raw material prices go up.  Check out all of the commodities associated with labels.  Every one of them – pulp, oil, resin, chemicals – is increasing.  Freight has increased significantly. Since the last industry wide increase six and one half years ago, operating costs have gone up.  No one is getting paid less.  Benefits haven’t gone down.  Is anyone paying less in rent?   Despite these facts, many people in our industry were surprised by the increase announcement.

I’ve written similar blogs many times over the last few years.  In most industries, price follows volume.  In other words, when volume goes up, prices increase.  That does not happen in the label industry.  Volume has grown over the last six years, but prices trended down.  Over the last few years, it seems like the only competitive tool the label industry has used is price.  Competing solely on price does not create a healthy industry, especially when costs are rising.  It does not require a PhD to understand that costs going up and prices going down leads to lower margins.  If you cannot provide value, expect your margins to go down.

 

Let the (Pricing) Games Begin!

May 15th, 2018

Last week, Avery Dennison, the market leader in pressure sensitive label products, announced a substantial price increase.  Depending on the product, increases range from 4% to 7%.  Additionally, all freight charges are being increased by 5%.  Increases in raw material and transportation costs are cited as the reasons for the increases.  This is the second announced price increase we have received in the last six months.  In the label world, the rest of the market typically follows once one supplier announces an increase.

I would love to be a fly on the wall in strategy sessions at Avery and their competitors.  As I’ve written in the recent past, component costs for pressure sensitive materials have increased.  There is a possibility of shortages, particularly among direct thermal products.  Freight costs have gone through the roof.  An objective observer would conclude a price increase is warranted.

However, competitive markets are not always rationale.  Spreadsheets and pretty graphs that show upward trends in costs and downward trends in margins are really nice to look at and tell a compelling, factual story justifying price increases.  Customers moving business and idle capacity hit the hearts of sales people and executives.  I can hear a sales person screaming, “You can have revenue with a lower margin or zero revenue with zero margin!”   Minds and hearts do not always agree.

It’s tough to “make it up in volume” when margins are declining.  Losing volume is never fun and generally causes executives heartburn and/or job loss.  Reality needs to set in.  We are in an inflationary environment.  Ignore it and eventually you will have to deal with the consequences.

The Greatest Lesson We Can Learn from Warren Buffett

May 7th, 2018

This past weekend was Berkshire Hathaway’s annual meeting.  Dubbed “Woodstock for capitalists,” the company’s annual meeting attracts and deserves great attention in the financial media and beyond.  The star attraction is Berkshire’s chairman, Warren Buffett.  (His partner, Charlie Munger, is worth listening to as well. )  Buffett’s every word is analyzed in hopes of figuring out what his next investment will be.  A searchable archive has been set up in which one can read every annual letter he has written and listen to past pearls of wisdom from previous annual meetings.  Take a look – it’s worth your time:      http://www.berkshirehathaway.com/

Buffett has famously said he invests in only companies and products he understands.  His investment portfolio is filled with household names.  Coca Cola.  American Express.  Dairy Queen.  And now Apple.    He has called derivatives “financial weapons of mass destruction.”  He “missed” the technology boom.  But his track record is impeccable.  Over time, he has outperformed every major stock market index.

Buffett’s wisdom can be boiled down to a few key words: Do the right thing and keep it simple.  Of course, that is easier said than done.  Businesses do not operate linearly.  The complexities of daily challenges often tempt us to come up with creative and complex solutions.  When challenges arise, take a step back and focus on what is right and simple.

We Live in a Short-Term-Thinking World

May 1st, 2018

On Sunday, the Cleveland Cavaliers won the seventh and final game in their first-round playoff series against the Indiana Pacers.  After the Cavs lost game 1 at home, fans and the media thought the Pacers had the series in the bag.  The series came back to Cleveland tied 2-2.  For a match up of the #4 and #5 seeds out of 8, that is probably what one should expect.  The Cavs won game 5 on a last-second shot.  At that point, most fans and a vast majority of the media thought the series was over.  Surely, they said, the Pacers were deflated.  The Cavs would win game 6 and move on.  Instead, Indiana blew the Cavs out.  Yet again, the tide turned.  Fans and the media predicted the Pacers would come to Cleveland and win the deciding game.  It was already a fait accompli that the game 7 loss would be LeBron James’ last game in a Cavalier uniform.  James put on yet another epic show and the Cavs won game 7.  All of this happened in a two week time frame.

It is one thing to be emotional about sports; the term “fan” is short for fanatic.  Sports reporters are trained to prey on fans’ emotions.  This short-term thinking mentality, fueled by constant connectivity and who can get the most re-tweets and likes, is overtaking our daily lives.  Daily gyrations in the stock market are treated as signs of a sea change in the economy and financial markets.   A few weeks ago, Donald Trump’s tweets were going to cause North Korea to start a nuclear war.  Today, we’re headed to peace in Korea.  I could go on and on.

In my world, fears of chemical shortages and cost increases (raw material, freight, labor) are beginning to dominate conversations.  Certainly, these trends are a change from the relative tranquility over the last few years.  However, the signs have been in place for months that costs were going up and shortages were a possibility.

It is not easy to stay level-headed with all of the short-term noise we hear. Often, it is also not that exciting.  Pay attention to facts and trends, not noise and emotions.   Remember, the tortoise won the race.

As Customer Service Declines, Expect More Automation

April 24th, 2018

My wife and I went to lunch last weekend at what would be considered, based on their prices, a high-end restaurant.  We arrived before noon and the restaurant was not very crowded.   We were seated with our menus and were told a server would be right over.  We waited a few minutes longer than we thought we should have.  The wait staff was gathered at the server station. Based on the laughter and body language we saw, they weren’t conducting a meeting prior to the lunch rush; they were rehashing their Friday night escapades.

When a server finally came over, we were ready to order.  She told us to go ahead with our orders.  My wife ordered, followed by me.  (Occasionally, I am a gentleman.)  After I was done ordering, our server, who wrote nothing down, said, “I’m sorry; I wasn’t paying attention.  Could you tell me what you want again?”   We repeated our orders to her.  Fortunately, what we ordered is what we received.  After we finished eating, we had to wait so long for the check that we went up to the bar to request our check instead.

After we left, we wondered what we paid a premium for.  The food was good but not anything extraordinary.  Moreover, the service was not in line with our expectations nor the price we paid.

Technology can replace the server function.  Have someone deliver water, deliver drinks, deliver food, and bus tables.  Let me order and pay online.  Servers go away.  Automation is being driven not only by technology but also by declines in customer service.  Think about how automation can improve your customers’ lives.  That’s how you’ll win.

Another Tax Season with no Thank You Notes and the Future Challenges of Real Estate Taxes

April 16th, 2018

For tax week, I traditionally list all of the places in which I, or our business, file and pay taxes and ask in vain for a thank you note.  I think we now file and pay taxes in 18 different jurisdictions (federal, state, and local).  So much for taxation without representation!  While no taxing authority has ever thanked me, all of them are good at reminding me of filing requirements and, especially, of payment due dates.

I am content (happy is too strong of a word) to pay income taxes; they’re only paid if you have an income.  I wish tax officials understood someone invested in and worked hard to generate that income.  While the process, especially on the state and local level, is ridiculously complex and convoluted and, in my opinion, unfair to non-residents, at least it is levied against income versus taxes levied against assets, such as real estate taxes.

Real estate taxes are levied against the value the taxing jurisdiction places on a property.  A few years ago, my brother was proud that he and his wife paid off their house.  I remember saying to him, “You still don’t own your house.  You’ve got a tax bill every year.  The taxing authority has a claim on your asset.”  Every year, when he gets his new tax bill, which is always higher, he reminds me of what I said.  My wife and I have lived in the same house for almost 15 years.  As friends of ours know quite well, we’ve put a lot of money in our house.  We might be able to sell it for slightly more than we paid, maybe 5-7% more.  Our real estate taxes have almost doubled over the same time period.  At some point, the public is going to start questioning the continual increase in real estate taxes.  Given the changes in federal tax laws that limit the deductibility of state and local taxes that point is coming sooner rather than later.