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Mid-Year Economic Outlook



Many are struggling, but some converters are bucking the recessionary trends



By Jack Kenny & Talar Sesetyan



Published July 18, 2005
Related Searches: Label converter Labeling industry TLMI Wine labeling
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The crunch is hitting home in the label and narrow web industry. Nine years ago, when the rest of the country was hit by a recession, the label business didn't suffer as much as did other segments of industry. Flexo was on a roll, and those who did feel the pinch soon shrugged it off and entered the roaring mid-1990s at full tilt. Now it's different.

The label business is a good barometer of economic health. When demand for products drops off, the demand for packaging declines as well. Label customers behave differently, ordering smaller quantities and backing off on product introductions. The converters are still at work, though they can gauge their customers' performance and their own through the shift in the size of orders. They also experience it through customer demands and other behaviors that manifest themselves in difficult times.

In several interviews conducted at the end of June, converters shared their concerns, hopes and fears about the economy. By and large business is flat, they say, though some are happily taking money to the bank as though there were no recession.

"We have been able to get through OK, and we're actually showing a 3 percent increase in volume over last year," says Nick Calvetti, president of Amherst Label Inc., Amherst, NH. "The economy has not had too much impact on us, but I don't see how we can escape if the whole economy is in a downturn."

Amherst Label, which does nearly $5 million a year in sales, is in "a cost-containment mode," Calvetti says. Top management is fine-tuning its plan for action in case things get worse, but so far no changes have been made.

In Oconomowoc, WI, Mike Dowling reports that business is flat. Dowling, president of CL&D Graphics, says he's "hearing more bad news than good from customers and other converters. It hasn't hit us yet, but I'm anticipating that things will get worse before they get better. That's what I'm preparing for."

That seems to be the thought trend. In May, more than a few converters were optimistic, hoping the second quarter was the bottom and looking forward to the third quarter as the period of upswing. Not so in June. "Grim" is the word from more than one observer.

Pockets of prosperity

It's not all gloom and doom, however. Just ask Trevor Maunder, general manager of Adams Label & Tag in Surrey, BC, Canada. "We're in the wine labeling industry, and whether the economy goes for a bit of a dive people still buy high end wines," he says. "It's very good for us — we're in our busy period. The first quarter was good, the second is really good, and we had the best record for revenues and net profit for the company in the month of May."

Adams also has a plant in Portland, OR, created from the merger of two acquisitions last year. "They're feeling a bit more of a pinch," says Maunder. The Canada operation, which has sales of about $5 million (Canadian), employs 35 people. The Oregon operation, which has 18 workers, has revenues of a bit more than $2 million (US).

Randy Wise, in Lancaster, TX, says he hears that his competitors are having "pretty severe" difficulties. But Wise, president of Century Tape & Label, says his business is up 20 percent, "a bit lower than projected."

"We're bucking the trend," he observes, noting that service gives him the advantage. "We focus on taking care of our customers."

For some label converters the change this year has been dramatic.

"The first quarter was the best first quarter in three years," says Bob Biava, president of Driscoll Label, Fairfield, NJ. "April and May were nothing to write home about." He describes his June business as "no growth."

Driscoll has had no staff reductions. On the contrary, Biava would like to add to personnel. "We're looking at hiring another salesperson to focus on a specific market. This person's sole concentration will be based on what we see as an up-and-coming business."

Up in New Hampshire, Calvetti of Amherst Label is also paying sharp attention to his sales force. "We are attempting to work a lot smarter," he says. "We're being more selective in the industries we're pursuing. We need to grow, and we want the efforts to be fruitful. We're not in a position to be spinning wheels, wasting time.

Amherst is sending its sales people to Sandler Sales Institute, where for three months they receive additional sales training and evaluation. "We're attempting to really hone the skills of the sales people, to make them as efficient and productive as we can.

"Our sales people go to prospective customers as consultants, evaluate their applications, the frequency of purchase and other factors, but stay away from price. We suggest cost savings and alternatives, trying to save the customer some money without compromising the application. We have some sales people here that will impress you out in the field."

Gary Gallas also has expanded the sales operation. "We're basically flat — same as last year," says Gallas, president of Andrews Decal and Label, in Chicago. "But we have added some sales staff, some office personnel to help increase customer service. Our service is very good, but it doesn't seem to be carrying over to any purchasing decisions on our customers' part. That's mainly because their sales are down."

Customers have troubles, too

"We do not see nearly the same level of new products coming from our customers, nor the exuberance with which people approach getting new products to the marketplace," says Rick Majewski, president of Chicago-based Impaxx, which owns 10 companies in the label and packaging industry. "The overall level of activity is off. There's a great deal of wait and see.

"We also see a lot of consolidation in our customer base taking place over the last year and a half," reports Majewski. "That has slowed some of the marketing efforts of those companies as they have focused on cost reduction related to the acquisitions." And also, he adds, consolidation means that "a customer is gone."

Impaxx and other companies are witnessing what Majewski refers to as "a proliferation of competitive bid packages in forms we've never seen in the past. These range from Internet-based reverse auctions to more formal in-house managed competitive bids that are sent out to large numbers of bidders. In one bid we were involved in there were 33 participants.

"What is that about? That's somebody not doing their homework. All of a sudden 33 people are qualified to do the work that you've been doing for your customer. This is happening in areas in which, historically, customers would tell you that you really had to be qualified, that you must pass certain tests and go through hurdles. The whole audit process is like a religion to some of these pharmaceutical companies.

"Then ÔShemp's Label Company' shows up on the list, and they say ÔWe'll qualify him on price.' You get ahold of these bid packages, and when you're the incumbent you know what this customer has required of you for as long as you've done business with them. They've wanted quick turnaround, ordering in small lots, asking suppliers to turn on a dime, but now they say they're not going to buy that way again. We know that they're not going to change the way they do business, but they're shopping that way. All of a sudden 33 people can be qualified to do this work. You took your own view of your customer that this work was high quality in nature, and it's turned into a commodity overnight. And that's how it's going to be produced. The quality is not going to be there at the end of the day.

"You want to say: ÔGive it to Shemp, let them see what they can do with it.' But you can't let this business go. You can't afford to, so you have to roll over, give in, do what you can to hold on to the business. It has caused a tremendous squeeze in terms of pricing and margins."

"Customers send letters all the time saying they want things cheaper, that they're reviewing expenditures," says Mike Dowling. "There's a lot of pressure. Every other week or so a letter comes from a customer saying the economy is in the tank and you need to come in here and figure out ways to cut costs. We're also getting a lot more unsolicited resumes, from talented people looking for jobs."


The labor decision
Impaxx is up slightly in unit volume, says Majewski, "but we're probably flat in terms of dollars. We're holding our own." The company has downsized in the past 18 months. "We absolutely had to," he adds. "That's the only way you can absorb these price reductions and stay whole at the end of it. We have had sizeable reductions; probably 10 percent of the work force."

"Our employees are concerned," says Gary Gallas. "Right now we have not cut back labor at all, and I hope that in the third quarter things will pick up and we won't have to do that. We'd like to get ahead of the flat scenario in the third quarter. If we finish flat we'll be OK. We do business with a lot of different industries, and none of them are all that busy. That's scary in itself."

Who's buying equipment? "We're not proceeding with any purchases," says Gallas. "We aren't buying presses on spec," says Mike Dowling. "We have to bring the business in house before we buy a press. If we don't land many accounts, we won't buy a press."

"We just purchased $150,000 worth of equipment," says Nick Calvetti, such as butt splicers and waste removal equipment. "It will make our operation more cost effective."

The year 2001 will see a solid increase in acquisition of capital equipment for Impaxx. The company relocating its carton operation in Los Angeles to a new building seven miles away and will get new presses. Two plants in Utah will be consolidated into one. "And we're bringing in a web flexo carton press into our pharmaceutical business to address parts of the market where we need that capacity to be more competitive."

Watching 3Q
Several converters put forth the belief that the economy will begin to turn around in the third quarter. Others are not so sanguine.

"Based on what I see, at the end of the second quarter, I'm not optimistic about the third quarter," says Bob Biava.

"Some people say the worst is over," notes Calvetti, "but I have been hearing that the third quarter would be the worst. I don't think we're out of the woods yet."

Dowling, who is the current president of the Tag & Label Manufacturers Institute (TLMI), says that when times get tight "one of the first things to go is association memberships. That's short-sighted — it's a valuable investment."

To illustrate his point, Dowling said TLMI is engaged in making an informal survey about the benefits that come with membership in the group. "The last number I saw was over $10 million that TLMI members have saved or realized as a result of the relationships they have made within the association."



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