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.

The Collapse of Sales Channels: Creative Destruction at Work

April 10th, 2018

“Malls Are Dying.”
“Retail is Forever Changed by the Internet.”
“Will We Buy Everything From Amazon One Day Soon?”

These recent headlines (or possible presidential tweets) dominate the news cycle. Nike, a huge beneficiary of a successful channel strategy (high end at specialty stores, mass market at large stores), recently announced its second strategic acquisition supporting a direct to consumer strategy. Disagreements between consumer product companies and retailers are becoming commonplace. Recently, Newell Rubbermaid accused Staples of not using marketing dollars to support Newell Rubbermaid’s pens. With increased margin pressure, expect more arguments to be in the headlines.

However, is any of this activity really new? Or is it a sign of the economy’s invisible hand at work? Jeff Bezos famously said, “Your margin is my opportunity.” That statement should be in economic textbooks defining what creative destruction means. Every day, someone is plotting a better way to build the proverbial mousetrap. Sears did it over one hundred years ago with its catalog. Woolworth did it with a consistent store format. K-Mart was once a retail leader. Sam Walton figured out a better way. Amazon has figured out an even better way.

Competition, another term for creative destruction, happens in every market in which the government allows it to happen. The headlines cover the negative aspects of a market economy. Job losses and bankruptcies make catchy headlines. Lower prices, more consumer choice, and jobs created don’t generate as many clicks.

Accept change. Make change. If you don’t, your competitors will – and you’ll be the subject of one of those negative headlines.

Is This the End of Paper Receipts?

April 3rd, 2018

Major suppliers of direct thermal paper announced another price increase last week.  At least one of them is being creative and calling it a “surcharge.”  My guess is that our friendly neighborhood laminate suppliers will follow suit with comparable “surcharges” or flat out price increases in the very near future.   The chemical supply constraints impacting direct thermal are real.

Direct thermal paper is used in the receipt paper market.  The receipt paper market had become so commoditized that a lot of the players have turned to making labels to save their businesses.  Refer to my comment last week that you’re only as smart as your dumbest competitor and you’ll understand why I have aged dramatically in the last few years!  Over the last few years, the receipt paper market turned to price as the main competitive weapon.  Other print markets have experienced this dynamic and the race to the bottom never ends well.

Suppliers of receipt paper have increased prices dramatically, even more so than we have seen in the label market.   As the costs to supply a physical receipt increase, more and more retailers will shift to e-receipts.   I can see a world in the very near future where you will not even be offered a paper receipt or that you will be charged if you want one.  It only takes one retailer to take the plunge and the rest will follow suit.  Once that happens, unless new markets are created, we’ll have a glut of direct thermal.  Until that time, check with your suppliers to make sure you can get product or consider switching print technologies.  I know a company with a great blogger that can help.

Another Warning about Inflation

March 26th, 2018

Last week, General Mills lowered its earnings guidance for the year, citing rising costs as a major cause of its lower projected earnings.  From the article:

The company cited higher commodity prices—including grains, nuts and dairy—as well as rising logistics and freight costs. On a conference call, management was contrite for not catching the trend of accelerating inflation earlier, and it outlined plans to respond by cutting costs, reconfiguring logistics networks and raising some prices.

https://www.wsj.com/articles/general-mills-sounds-inflation-alarm-for-food-industry-1521647927?mod=djemheard_t

I’ve been writing about rising commodity and freight costs for a while.  That trend is not our friend right now.  Add in saber-rattling regarding trade and we are clearly in an era of rising costs.

Even less friendly is the fact that anyone who entered the workforce in the last 10 years has never dealt with inflation.  Buyers are used to negotiating for lower prices.  Salespeople are used to selling on price.  That’s a bad combination in an era of cost increases.  Unfortunately, you are only as smart as your dumbest competitor.  Dumb competitors will continue to sell on price.  They will continue to make it hard to pass increases on.  Remember, the purpose of a business it to make a profit, not trade dollars.  Also, remember that pigs get fat and hogs get slaughtered.  It’s a fun balancing act.

I do not think we are headed towards the double-digit inflation rates of the late 1970s and early 1980s but after averaging slightly over 1% for the last decade (and a large part of that was healthcare related), a change to 3% is quite significant.  Wage inflation will follow the increases in product costs.  Be ready.