It's not easy bein' green," crooned Kermit the Frog a number of years back. In today's label printing economy, we could fill Radio City Music Hall with a chorus of business owners singing, "It's not easy being a converter."
A recently released survey of consumer product companies in the United States indicates that over the past two years, these 100 companies have secured price reductions approaching 10 percent for their flexographic label requirements. The respondents to this survey also indicated their expectation of further price reductions of between 1 and 10 percent in 2006.
At the same time that this survey was being conducted, the pressure sensitive material vendors were marching in virtual lockstep as they raised their paper and film prices to flexo converters somewhere in the range of 4 to 7 percent. This most recent increase, coming on the heels of three or four similar increases over the past two years, was blamed on, among other factors, rising oil and gas prices, the aftermath of Hurricane Katrina, undercapacity of paper converting mills, the referees of Super Bowl XL, and the insensitivity of a Danish cartoonist (whoops, my mistake - that will be the justification for the next price increase).
On Capitol Hill, the escalating costs of healthcare benefits is getting heaps of attention and media coverage, but the balance of that coverage is decidedly anti-business. Certain politicians, whose health benefits are paid for by our tax dollars, believe it is corporate America's responsibility to provide these benefits. These are almost always the very same politicians who decry the outsourcing or elimination of American jobs due to the high, non-competitive cost structure, which includes the rapidly rising cost of healthcare benefits.
The rate of unemployment in the United States is reaching record low territory, and has certainly dropped below the natural rate of unemployment. This news, in general a good thing, ironically further escalates the costs of doing business in the US by reducing the supply of job seekers, which in turn raises the entry level and hourly wage scale (another social and political positive), which in many companies necessitates upward wage and salary adjustments throughout.
Despite a changing of the guard at the US Federal Reserve Board, interest rates continue to rise. Again, this can achieve wonderful results along the lines of boosting savings rates, especially given the expected slowdown to the supposedly unsustainable housing boom. However, for businesses, these extra quarter and half points are tearing dollars right out of the bottom line. This hurts not only label converters, but their customers as well as their vendors. In particular, capital equipment manufacturers who sell primarily financed or leased products are in effect selling their products at a higher price, but realizing no additional profits, which inhibits their ability to offer discounts to counteract the imminent slowdown in their markets.
Against this backdrop, there are those in Washington, DC, who are doing their best to not only stop the Bush tax cuts from becoming permanent, but seeking to raise taxes as well. The damage that a tax increase would do the national economy has been well documented, but the trickle up effect of removing dollars from the wallets of consumers will affect converters and their suppliers by hurting the consumer product companies whose label purchasing drives the entire supply chain.
Of course, we can't forget the impact that China is having on our marketplace. While the number of labels being printed and imported from China is relatively small, the great impact on our industry takes a couple of forms. First, the growing number of products whose manufacture is relocating from the US to China reduces the total label market for US converters. Second, the emergence of lower priced (and, some would argue, lower quality) raw material vendors from China seeking market share in the US will further drive label pricing lower, hastening the eradication of meaningful margins.
And while we are on the subject of low cost providers, there is the Wal-Mart issue, which just about every converter has to deal with on some level. Chances are, you are supplying customers who either are Wal-Mart, sell to Wal-Mart, compete directly with Wal-Mart, or sell to direct competitors of Wal-Mart. And with the Bentonville behemoth's recent announcement of its intention to open up an additional 1,500 stores in the US in the near future, the price pressures on consumer product companies and, by extension, their label vendors will without a doubt intensify.
Of course, it's hard not to keep an eye on the raging trial of Skilling and Lay in Houston. It's even harder not to note the impact of the post-Enron political handwringing, which is costing businesses money in the form of the Sarbanes-Oxley compliance tax. Even for private companies, the impact is seen in the form of higher costs from vendors that are public companies, price pressures from customers that are public companies, and higher rates and less liability from accounting firms. Make no mistake about it: When business costs of any type rise, purse strings tighten when it comes to costs, and prices invariably rise.
It is worth noting that most consumer product companies continue to operate under the somewhat misguided impression that prime labels have reached commodity status. Based on the prevalence of reverse auctions and the consistent lack of in-depth qualifying of potential vendors, it is clear that today's label purchaser differentiates vendors primarily along the scales of pricing, terms and a willingness to throw in prepress and inventory/distribution services at cost, below cost, or even gratis.
We could go on and on. But let's pause and summarize with a reality check for today's narrow web label converter:
- Customers are demanding lower prices.
- Vendors are demanding higher prices.
- There is overcapacity of label production.
- There is undercapacity of raw material production.
- Business costs are escalating everywhere you turn.
- Healthcare costs are rising.
- Wages are rising.
- Competition - both ours and our customers' - has never been fiercer.
- Pricing is being marginalized on the basis of commoditization - but unlike other commodities, prices just fall.
To combat these problems, converters are seemingly flailing about, seeking solutions from just about every direction. Some are slipping in "seconds" instead of A-grade material. Others are investing in systems and equipment to improve efficiencies. Others see improving quality control as a key cost reducer, and are installing costly computerized vision technologies. Still others are finally embracing production capabilities that will elevate their product in the hopes of staving off competitors with lesser quality. But the costs of these capital intensive solutions are rising, and the state-of-the-art life span of this equipment is rapidly dissipating due to the accelerating pace of technological advances. All of these factors drive mergers and acquisition activity within the industry, where business owners kneel at the altar of operational consolidation, where profitability and competitiveness are theoretically enhanced by the elimination of redundancies while spreading the remaining fixed costs across greater revenues. All in all, not the rosiest of pictures for the narrow web label converter.
And yet, a great many label converters are optimistic, seeing continued growth in both revenues and profitability. No, I'm not joking - I even count myself among them. Call me crazy, but out of the aforementioned economic cesspool, we optimists are spotting opportunity.
I had a literature professor who once described Opportunity as someone shooting past you at high speed, someone with shaggy hair obfuscating the face, but who is completely bald from behind. By the time you realize that this someone is worth grabbing onto, it has passed you by, and even if you reach for it, there is nothing left to grab onto anymore. The key to taking advantage of Opportunity, this professor would say, is to see through the shaggy hair in time to latch on.
So what are the opportunities in our marketplace? For each of us, they are somewhat different. But in order to see them, you need to suspend your own aggravation about the economics of the industry, and focus on the aggravation of others, for out of aggravation dost rise opportunity. Labels may not be able solve your customers problems, but neither can lower priced labels. However, the capacity, capabilities, talents, and expertise of label converters just might be able to alleviate something, somewhere, in some consumer products company's list of headaches.
For example, retailers today have the monumental task of competing with lower cost online merchants as well as Wal-Mart. Their profitability hinges on their ability to squeeze costs out of the system. This drives them, their consumer product suppliers, or their suppliers' suppliers to China. In most cases, the actual costs of labels are incredibly insignificant in the overall scheme of their problems, yet the label is attacked because the label purchaser perceives commoditization, ease of vendor switch, and minimal impact to the final product.
However, quite a few forward thinking label companies have integrated themselves into the product design and procurement process within their customers, not only insulating themselves from direct hits on this front, but legitimately offering cost-reducing options that are not at the expense of their own profitability. Instead of sitting back and bemoaning a customer's lack of understanding of your production methods, take a step forward and develop your own understanding of your customer's operation and production and cost requirements. Present your customer with concrete ideas for process and cost improvement. Often, these will be matter-of-fact to you, but will be revolutionary to your customer's way of thinking. At the same time, keep your mind open to learning from their processes. Often, what is matter-of-fact to them will be revolutionary to you!
Be realistic: There's no conspiracy among your customers, vendors, Congress, and the global economy to put you out of business. The blurring of the macro and the micro is the defining characteristic of 21st Century economics. Remind yourself that your customer's goal is not to reduce your profitability; it is to increase his own.
Smart, thinking companies know that cost reduction does not automatically equate to profit reduction. As clichéd as it might sound, the key for the label converter today is to become part of the solution, and avoid being perceived as just another part of the problem. The companies that generate opportunities within their markets to do just that - and are sincere in their efforts on behalf of their customers - may very well discover creative solutions to their own problems in the process.
Elisha Tropper is president of Prestige Label Co., headquartered in Burgaw, NC, USA.