“Of Course It’s Personal!  It’s My $&@*@&() Money!”

August 8th, 2017

I have an acquaintance who spent many years in corporate life.  He had overseas assignments and rose to a very high level on the corporate ladder.  After a family member’s health scare, he decided to take a buyout while relatively young.  I don’t know the particulars, but I’m pretty sure he and his family were more than financially set for life.  After a year of settling down and relaxing, he got bored.  He bought a business in a completely unrelated industry.  He is now about five years into his new venture.

We met about three years ago through a mutual friend.  We talk a few times a year, often trading stories about our businesses.  We had a conversation a few weeks ago that went something like the following:

“Brian, I remember a conversation we had about not taking it personally when you think someone takes advantage of you.  I had a customer promise me ‘the check is in the mail.’  He even sent me a picture of the check.  We’d done business with his company a long time, before me.  We did work for him based on that promise.  Guess what?  The $*#*(#* check never came.  Now, I’m out that money plus the additional stuff we did – the business is gone.  Of course it’s personal!  It’s my $*&$*)(#(  money!  It’s no different than if he held me up at gunpoint and took my wallet.”

Fortunately, the amount of money at stake won’t bankrupt the company; they’ll be just fine.  I’m fairly confident my buddy won’t have a stroke, either.  So this too shall pass.  I did ask him a question: “What would have happened if you were still at XYZ Company?”

He paused a few seconds and said, “Well, I probably wouldn’t have been involved in this decision.  Proportionately, this customer’s issue would have never made it to my desk.  My guess is our credit department wouldn’t have allowed us to ship that second order.”

So I probed a little more: “So there’s a process in place to prevent the company from losing more money?”

He replied, “Yeah, there was.  Why the $*&$*#) don’t I have a process?”

I said, “You do.  You just didn’t follow it.  I was just at a management conference and the key message was, ‘Focus on the process, not the people.  If something goes wrong, fix the process.  Don’t blame the people.’  I then questioned his intelligence for accepting the old “the check is in the mail” line.  I came clean and told him our biggest credit loss ever was a result of me accepting a version of that story from a big customer that went belly up.  I assured him I changed my process after that debacle.

Business is always personal.  Relationships should matter.  However, emotions cloud our judgment when dealing with people.  Adhering to processes can save a lot of heart aches and prevent bad decisions.  We can learn from the process standardization that big companies use.

Pay Attention to the Warning Signs

August 2nd, 2017

We’ve experienced a long, albeit tepid, economic recovery since the Great Recession.  As our president trumpets nearly every day, the stock market is at all-time highs.  Unemployment is near record lows.  All is well in the economic world, right?

Here are a few warning signs that concern me:

  1. The Federal Reserve has begun monetary tightening in earnest. Not only have they raised interest rates and pledged to continue to do so, it has started unwinding its bond purchases.  Over the last 10 years, the Federal Reserve increased its balance sheet from just under $900 billion to $4.4 trillion, meaning it has been purchasing government and government agency debt, helping keep interest rates low. (https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm .  I can’t even come close to comprehending those numbers.)   It is going to start unwinding this massive monetary stimulus.  While this is probably the right thing to do and the Fed has indicated it is going to do so very slowly, this action will draw money out of the financial system.
  2. The US has indicated it might issue trade sanctions against China. President Tweet campaigned promising “fair trade” and his administration has threatened trade wars.  Trade wars don’t help economic growth.
  3. Auto sales have slowed. There are only so many 6 and 7 year car loans banks can give out.
  4. Credit card delinquencies are rising.
  5. Anecdotally, I’ve noticed our customers are stretching their payment terms with us. I’ve talked with a few vendors and a few customers.  All have indicated the same trend.

Economic cycles are inevitable.  I don’t know when the cycle will change but it will.  My best guess is within the next 18 – 24 months, we’ll be in a recession.  Monitor cash.  Control your expenses.  Check credit references when new customers knock at your door.  Be prepared to take advantage while others are struggling.  You’ll have the opportunity soon.

Take a Stand, Republicans!

July 25th, 2017

For seven years, Republicans basked in the glory (sarcasm intended) of holding ceremonial votes repealing Obamacare.  Our esteemed legislators (again sarcasm) had nothing to lose during this time.  They didn’t have enough votes in the House or Senate to override a certain presidential veto.  With much fanfare, they voted for repeal time and time again.  (I researched how many times they voted to repeal Obamacare.  The answer is somewhere between 6 and 50, depending on how riders to legislation are counted.)

Now, with majorities in the House and Senate and the presidency, Republicans are acting like the proverbial dog that finally caught the car.  They don’t know what to do now that their vote will actually have an impact.   Help me understand this:  you were elected on a platform that included repealing and replacing Obamacare.  Now you’re afraid you’ll lose elections if you actually do what you put in your campaign platform.  Good luck with that logic.

How about starting by acknowledging the reality most Americans already know?  Obamacare had nothing to do with helping healthcare costs.  All it accomplished was a giant wealth transfer from the working and reasonably healthy to the poor and less healthy part of our population.  On many levels, that’s not a bad thing, especially if you are poor and/or sick.  But if you’re a working class family, you are questioning what Obamacare did for you, other than raise your premiums and deductibles quite dramatically.  Representatives and Senators,  in case you’ve been living under a rock, those are the people that tipped the election to Donald Trump.  If you think recanting on the promise to repeal and replace will ingratiate you to those voters, I’ve got some swampland in Florida for you.  If you think doing nothing will help you with voters that support Obamacare, I’ve got a bridge to nowhere for you.

Leadership involves making difficult decisions.  Republicans, if you’re not comfortable making difficult decisions, you’ll rightfully lose your chance at leadership.

 

Multi-Color Buys Constantia’s Label Division: The Value Chain is Changing

July 17th, 2017

On July 17, Multi-Color announced it was purchasing Constantia’s label division, creating a $1.6 billion revenue label/packaging provider.  As I’ve written in the past, the big keep getting bigger.  With slow economic growth, expect consolidation to continue.

A link to the press release can be found here: http://phx.corporate-ir.net/phoenix.zhtml?c=78090&p=irol-irhome.   I pulled out what I found was the most interesting paragraph.

Cost synergies are anticipated to reach $15 million (or 2% of acquired revenues) by  Fiscal  Year  March  2020 through  a  combination  of procurement, SG&A, and manufacturing  efficiencies.  As an example, Multi-Color will utilize Constantia Labels’  pressure  sensitive  substrate  manufacturing  capability in the US and Europe  to drive future  efficiencies. (Emphasis added) Both companies  currently generate EBITDA margins of approximately 18%.

That sentence is the opening salvo for negotiations with material suppliers.  The current score of those negotiations is Multi-Color 1, Material Suppliers 0.  Size creates bargaining power in several ways.  The obvious way is sheer mass.  In general, higher volume leads to lower prices.  The less obvious way is a large capital base allows large companies to vertically integrate.  Constantia made some of its own substrates.  Multi-Color will take advantage of these capabilities.

At some point, the well-capitalized laminate suppliers might look at a competitive response.  Do they start printing and converting?  Do they buy printers?  If I’m on the board of one of those companies, I’m asking those questions.  If I’m an activist investor, I’m asking why Multi-Color and Constantia have EBITDA margins that are significantly higher than the publicly traded laminate suppliers.  The fun in our value chain is beginning.  Change is coming.  Years ago, Stan Avery founded a label business that bought a laminate supplier.  They eventually sold the label business (or at least most of it) and focused on supplying materials to converters and printers.  Will  we go back to the future?

Make It Easy!  Make It Easy!

July 10th, 2017

Hopefully, you’re humming the Eagles’ tune as I am as I write this entry.

The older I get, the worse my technology skills.  I’m definitely in exponential decay when it comes to my technology skills.  It was time for a new computer at work and I approached it with dread.  Configuring a new computer and all the devices I attach to it is not what I consider fun.   I delayed our IT Department as long as possible before making the switch.  I’m proud to say I had nothing to fear.  I’m like a proud papa and have to tell you how they handled the switch over.

First, they prepared.  They had my new computer loaded and ready to go.  We literally unplugged the old machine, plugged the new one in, entered a few passwords, and magically, my computer desktop appeared.  Second, they under promised and over delivered.  They told me it would take a half hour.  It took less than fifteen minutes.  Had they told me ten minutes and it took fifteen, I would have been irritated.  Instead, they set expectations that were realistic and did better.  Finally, they followed up.  Shortly after configuring all my devices, they checked back in to make sure everything was working.  I had one minor issue that they resolved in a matter of seconds.

It’s enjoyable to have a good customer service experience.  It shouldn’t be hard.  Prepare.  Set expectations.  Follow up.  A simple recipe for success in today’s over complicated world.

Getting Your Customers’ Attention Requires More Than Email

July 5th, 2017

Two weeks ago, I attended a conference with several customers. In talking with several customers about our product lines and capabilities, a common theme developed. Multiple times, I was told, “I didn’t know you could do that.” That’s a painful message for the guy with a lot of money invested in equipment and people but it’s reality. If customers don’t know your capabilities, they can’t buy those products/services from you. Sending emails isn’t enough to get you message across.

Many customers asked if we could arrange “lunch and learn” programs with their teams. Is there anything better than a customer that actually wants an in-person visit? Talk about a great way to develop or deepen a relationship. Fortunately, we’ve got talented people that can deliver our message in person.

I’m wise enough to know our sales and marketing team does a good job of communicating with our customers. I’m also wise enough to know we can always improve. Like most businesses, we use email extensively in our marketing efforts. Email is a useful tool but it is not a cure all. When I was in ROTC, I vividly remember an officer training us on public speaking. He said, “The key to getting your message across is ‘Tell them what you’re going to tell them. Tell them. Tell them what you told them.” Repetition helps people remember. In the hyper-connected world we live in, messages often get lost. If you want your customers to know your message, you must proactively communicate with them. That requires more than marketing sending an email. Send a note. Pick up the phone. Get on a plane. If you truly know your customers, you’ll know how to get their attention.

The Government Giveth.  Can the Government Taketh Away?

June 27th, 2017

The debate over healthcare reform rages on.  Earlier this week, the Congressional Budget Office (CBO) said the Senate’s reform plan would lead to 22 million additional uninsured people in the US as well as reduce the deficit by $321 billion.  Is anyone really surprised that the government spending less money on healthcare will lead to more uninsured people?  Can the government take away what has become an entitlement to those 22 million people?  Obamacare cost the Democrats the House; don’t be surprised if Trumpcare does the same to the Republicans.

Recently, a particular part of Obamacare is getting a lot of attention.  The opioid crisis is getting worse by the day in this country.  Addicts typically start with pain pills and then turn to heroin or synthetic versions available on the street.  More people are killed by drug overdoses than gun shots or car crashes in this country.  (http://www.cbsnews.com/news/drug-overdose-deaths-heroin-opioid-prescription-painkillers-more-than-guns/)  As part of Obamacare, insurance companies are required to spend virtually unlimited dollars on rehabilitation for drug addicts.  I know you’ll find this shocking but bad guys have figured out how to exploit that system.  They set up “sober houses” for addicts to live.  The addicts are then drug tested and treated with outpatient therapy.  A relapse allows the addicts to stay longer and get more treatment.  Guess who often supplies the addicts with drugs?  The sober house owners!  The outpatient clinics collect more money and pay kickbacks to the owners of the sober houses.  The two links below illustrate what a tragedy this has become.  If you can, please watch the Megyn Kelly piece that aired this past Sunday on NBC.  It is shocking.

As I write this, the Senate just announced it is delaying its healthcare reform vote.  Our president infamously said, “No one knew healthcare could be so complicated.”  Gee, thanks for the insight, Donald.  As the opioid tragedy we are witnessing demonstrates, healthcare is beyond complicated.  It sound reasonable to give addicts all the treatment they need until someone figures out how to game the system.  Our healthcare system is filled with perverse incentives.  From what I’ve seen, the Republican plan does little to change incentives.  Until the incentive structure changes, we’ll continue to spend more money with worse results than the rest of the world.

http://www.nbcnews.com/feature/megyn-kelly/florida-s-billion-dollar-drug-treatment-industry-plagued-overdoses-fraud-n773376

http://www.ocregister.com/2017/05/21/how-some-southern-california-drug-rehab-centers-exploit-addiction/

Amazon Buys Whole Foods: Convergence Continues

June 19th, 2017

On Friday, Amazon announced it was buying Whole Foods.  After tinkering with physical locations, including small grocery stores, this now gives Amazon a significant physical presence in the grocery business.  The digital and physical words convergence continues.

Whole Foods had struggled recently, as traditional grocers and online retailers increased their offerings of organic and health conscious foods.  Obviously, Amazon believes it can revive Whole Foods growth. This is an interesting business combination.  Amazon is relentless in its focus on selection, delivery accuracy, and price.  Whole Foods is a premium brand selling premium products to demanding customers.  Can Amazon cut costs at Whole Foods and retain its premium image?  Can Amazon use Whole Foods physical locations to improve delivery of its other items?

The finance guy in me looks at the other end of convergence.  Traditional grocery and retail stores have operating margins in the 3 – 5% range.  Whole Foods operating margin was approximately 4.5%.  Amazon’s operating margin is slightly under 3%.  Yet a dollar of Amazon’s earnings are valued at anywhere from 5 to 15 times a dollar of grocery or retail earnings. (Amazon’s price to earnings ratio on a trailing basis is 180 times (yes 180 times); Whole foods was 34 times at the acquisition price; Wal-Mart’s PE is 17 times and Kroger’s PE is 12 times.  I understand that Amazon has some incredibly profitable businesses (at least we think they do) but at some point this valuation gap has to narrow.  The market is betting that Amazon will continue to take market share and improve its margins.  I’m sure many traditional grocers/retailers are scratching their heads at the sky-high valuation Amazon is afforded.  I heard a statistic that to justify its lofty valuation, Amazon would have to continue growing at least 25% a year for the next 25 years.  If it did that, it would comprise almost 40% of the US domestic economy.  (I haven’t verified these numbers but they are directionally correct.  That was enough for me.)  I have a feeling a few companies and a whole lot of regulators will work hard to not let that happen.

The real moral of the story is there is no digital and physical world; companies need to do both.  Groceries can’t be digitally transported to houses.  But combining digital ordering with ease of pick up or dense delivery routes could change the way a traditional grocery store’s physical space is used.  All of these trends are good for companies that help with logistics and inventory management.

A Lack of Customer Care

June 13th, 2017

Last year, a certain large telecommunications/internet provider/cable TV company that I am a customer of “encouraged” me to switch my television service to a certain satellite TV provider it had purchased.  I did so and supposedly saved oodles of money.  Yesterday, I got a piece of what looked like junk mail from said provider.  Maybe all the commercials about the upcoming “Spiderman” movie but my Spidey sense prompted me to open the form letter.  (Hasn’t Hollywood done enough versions of Spiderman already?)  The letter congratulated me on renewing my NFL Sunday ticket package.  That was interesting – I never knew I had that package.  Maybe they assume that living in Cleveland means I don’t get to see real NFL football on a regular basis so I had subscribed.  In fine print at the bottom of the letter, it said if I didn’t cancel by a certain date, I would automatically be billed an obscene amount of money.  The only way to cancel the service was to call their “customer care team.”

I called the 800 number.  I got the lovely automated system.  It told me I wasn’t a subscriber to NFL Sunday ticket.  Even more fun.  So I asked to speak to someone.  After a few minutes and having to identify myself again (I’ve written about technology companies not using technology before.), I got to an attendant.  She told me I had NFL Sunday ticket as part of a promotion last year.  I told her I didn’t want it and wanted in writing that I had called to cancel.  In these exact words, she replied, “Sir, our system is unable to provide written confirmation for this transaction.  I can provide you with my employee ID number for your reference.”  I was stunned.  Any other change to my account leads to at least an email acknowledgement.  After I questioned her answer, she told me I wasn’t the first person to ask for the cancellation in writing and, “Management is aware of the issue regarding confirmation requests.”

Does anyone wonder why people are “cutting the cord” and dropping their television providers in favor of streaming via the internet?  The company is counting on people not opening that letter and defaulting in to signing up for service they might not even know they have.  Clearly, Ma Bell is run by bean counters who have no idea how to treat customers.  Using the term “customer care team” doesn’t mean a thing if your policies are inconsistent with caring about customers.  We live in a world of choice.  Consumers  will avoid companies that don’t treat them well.  If your company doesn’t treat its customers well, another company will.

Time Flies: A Few Lessons and Many Thank You’s for The Last 10 Years

June 5th, 2017

It is hard to believe that on June 4, 10 years passed since my wife and I went all in and then some to buy I.D. Images.  It has been and continues to be a great ride.  Like most rides, there have been some bumps along the way, but the good far outweighs the bad.  I am confident we are heading the right direction.  As I reflected about the last 10 years, a few of our values stood out to me.  If you’re a regular reader, these might sound familiar.

  1. Of the 58 employees at I.D. Images when we bought the business, 32 still work for us.  I still regularly talk to several who have moved on.  10 years is a long time to work in one place.  We have continued a partnership with our major supplier that has been in place since 2006.  Our corporate attorney and bank remain essentially the same (they switched firms).  Strong outside advisers are a necessity in today’s world.  I still regularly meet with our founder, Dick Yisha.  Strong relationships make strong companies.  Thank you to our entire staff and partners.
  2. Customer Driven. Of our top 10 customers in 2007, 7 remain significant customers today.  Four remain in the top 10; three others are in our top 25 customers.  Two went bankrupt (that wasn’t fun) and one took business in house.  (You know who you are and I still love you.)  Customers are the lifeblood of any business.  As I said in the first message to our team when I bought the business, “Customers, not Dick Yisha or me, produce your paycheck.”  To all of our customers, a sincere thank you.  Without you, there is no I.D. Images.
  3. Results Oriented. If we weren’t producing results, there would be no customers, no employees, and no partners. In business, there’s a scoreboard every day.  Numbers don’t lie.  We certainly don’t win all the time.  Just like in sports, we have to get better to stay in the game.

If you’re reading this, you most likely have some connection to I.D. Images.  Thank you.  A final big thank you to two very important women in my life.  Mom, you often drive me crazy (I guess it’s payback.) but without your support (and Dad’s when he was with us), I wouldn’t be here.  Kelly, I know I often drive you crazy but without your unconditional love, common sense, and belief in me, I’d be a rudderless ship.  Thank you doesn’t do you justice.

The first 10 years were great; the next 10 will be better.  Thank you for being part of the journey.