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'We Are Not Happy'



Economic strife strains sales and margins of label converters.



By Jack Kenny & Steve Katz



Published October 14, 2008
Related Searches: Label converter Lean Manufacturing TLMI UV flexo
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Sales are down 4 percent. Sales are down 30 percent. Flat, up 16 percent, up 50 percent. Profits are down significantly. Profits are down 6.6 percent. Profits are up for the quarter and the year. Profits are down 40 percent. We are laying off workers.

These are answers from label converters, large and small, to questions put to them last week about the impact of the economy on their businesses. Clearly, the pattern in the industry is as it always has been: no pattern at all. One consistent thread runs through all of their comments, however: They are jittery, and looking forward with anxiety to the near future.

The editors of L&NW conducted an informal survey of 40 label companies in the United States in early October, asking about sales and profitability, the impact of materials price increases, their ability to raise prices to their customers, and the efforts they are making internally to keep their companies functioning well. Fifteen converters responded. We offered anonymity to those who requested it, and most did.

Sales


We inquired about sales trends for the year. Again, no pattern. Conversations with converters indicate that those in the healthcare, food and beverage, and specialty converting markets are suffering less than others. Here are some responses:

"Sales are significantly up for the first half of the year over last year, but we definitely see a slow down through the third quarter. The fourth quarter is starting out strong, but I don't expect it to continue."

"Through August our sales were up 7 percent from last year. August and September were dramatically lower than last year, so year-to-date our sales are the same. We estimate our sales figures will be the same as last year."

"Our sales for the first nine months have been consistently strong, and we're currently tracking a 16 percent increase over the same time period last year. In fact, we installed a new 10 color UV flexo press just this week to help keep up with demand. That being said, as we ended September and entered into October we have seen a decline in activity. As the industry adage goes, 'No surer way to clean out the pipeline than buying new equipment!'"

"After running unchanged for the first two quarters of 2008 (relative to 2007), our sales are up 12 percent for the year at the close of the third quarter. We typically finish our fiscal year with a strong fourth quarter and are expecting the same result for 2008. But we are concerned about what is coming after the first of the year."

"We have a very broadly diversified customer base, so sales are not highly concentrated in any one industry or with any one company. That said, our biggest industry served is healthcare, which does not seem to suffer from these sorts of economic fluctuations much. We have added quite a number of new customers, but some customer losses combined with declines in orders from others have resulted in an overall decline in sales so far this year."

"Our sales are off 4 percent versus last year as a direct result of the economic impact on our customers."

"Our sales are up 50 percent from last year, which is great since we are only entering our third year of operations."

"Sales are definitely down. We're off about 30 percent."

"We are ahead of last year by 15 percent."

"We have not the seen same growth pattern that we have seen in the previous years. We continue to acquire new customers but existing customer sales have seen a slower growth or even decline, depending on the industry."

Profits


"Profits are down significantly."

"Our profitability has suffered slightly due to increased competition from firms that are becoming desperate."

"Profits for repeat jobs have gone down by approximately 2 to 5 percent (depending on the job) due to increases in the price of stock (three increases since January) and increases in shipping and gas surcharges. We have not approached our customers with price increases as of yet, but we will at the beginning of next year."

"Pre-tax profits are down 40 percent."

"Even during the first half of the year, when sales were about even with last year, profits were down, as rising raw material costs, and some increases in labor, have been putting the squeeze on us."

"We have reorganized the company to be 'right-sized.' This has allowed us to actually increase profitability over the prior year significantly. We are taking steps daily to make sure that continues."

"So far we have been able to manage our expenses well enough to keep our profits level with last year."

"Profits remain the same or slightly better."

"No change so far, but let's see what the next several months bring. Otherwise we have been able to grow sales and offset energy increases through the implementation of energy saving programs and some of the material increase through Lean Manufacturing initiatives."

"Profit decline is the most noticeable. Material increases and fuel charges have taken a chunk out of our profits.


Impact from material price increases


Suppliers of labelstock have announced several price increases this year, in some cases. The effect on label converters is dramatic and has heightened tensions in customer relations, in both directions. But the materials suppliers themselves are having rough days. Paper is expensive because of high transportation and manufacturing costs, declining demand and the closing of paper mills.

"We just got a call from our major paper stock supplier that effective November 1 prices will increase 7 to 10 percent. We are not happy. That means for the year prices are up over 20 percent! These increases have had a big effect on the bottom line. It has been difficult to pass all these increases along to the customer on a timely basis."

"This has significantly impacted both our top and bottom line. We're finding people placing much smaller orders and putting new projects on hold completely."

"This is the second battlefield in maintaining profitability. Just when you think you have gained an edge, your vendors come in and take them away in the form of price increases on raw materials and services."

"Materials price increases have had a negative impact on our bottom line, but nothing we have not been able to overcome."

"We have been able to substitute many of our materials with lower cost options for our customers."

"We have lost about a point and a half of margin due to increased material costs."

"It has hurt. We have had to make adjustments to compensate. We also have learned to live with less."


Raising prices to customers


Tom Spina, president of Luminer Converting, in Lakewood, NJ, shares this thought: "I was one of the guys who stood up at the spring 2008 TLMI meeting and said raw material costs were not effecting us because we are a specialty manufacturer. Well, maybe it just took a little longer to get to us because it has certainly had a significant effect on our bottom line. We have huge price increases that we simply can't pass along. We are sandwiched between large vendors and large customers so there is not much we can do. The biggest problem is that we were able to put through small price increases, but right after the letters went out, the postman dropped off even larger price increases from the same vendors that raised prices two months before. I cannot pass those on. However," he adds, "those price increases came when oil was $140 a barrel. Now that it's at $90, where are the price decreases?"

Comments from others:

"There is no way label producers could increase prices to our customers 20 percent without seeing a big exodus from their customer base."

 "The simple answer is no. What has been frustrating is our customers' insistence on keeping pricing the same while our vendors insist on increasing pricing."

"We pass the rising cost of paper to most of our customers as a pass through on re-orders. Where we are running into trouble is with our larger customers where we have informal contacts. We fear that rising prices will give them a reason to shop when they might otherwise not."

"In most cases we have been able to pass on a portion of the increase over time. I am very concerned about this next round of increases coming through, the third one this year, considering the fact that we are still finalizing increases with some customers on the last round. In one specific instance, the same day we finally negotiated an increase with a large customer we received notice that the material is being raised again. We have also worked hard to find less expensive material alternatives to try and hold pricing."

"It is difficult to pass these costs on to our good customers, those who really pay our bills. We can pass an increase on to an occasional customer that doesn't spend much on labels – they don't really notice – but the really solid people that make our company run are not willing to take a price increase in most cases."

"After running the course of critical self examination and internal efficiency initiatives during the materials price increases a few years ago, we passed the latest increases through to our clients. Surprisingly, they have been remarkably understanding. It hasn't had a negative impact to our bottom line."

"Yes, we have been able to pass along price increases in most cases, and in some cases raised prices in excess of material cost increases. We just got a letter from a major supplier telling us prices are going up again, and it looks like we're going to have to work our magic with our customers again."

"We will approach this subject with our customers come the new year. We have notified them of potential increases in January, and will sit down with them to discuss increases and/or find more cost effective solutions to their labeling needs (e.g., different stock options, fewer colors in the label, reduced plate changeovers, and color changeover costs for jobs with multiple copies). This is where we get creative."

"We are able to pass some increases along to customers but not nearly what we have absorbed. It's too competitive a market right now to give customers a reason to shop. Many customers understand the situation but that doesn't mean they are willing to take on the full burden."

Maintaining company health


We asked converters to tell us what steps they have been taking to maintain the well being of their business during this time of economic strife. There were a few of jokes: Two mentioned alcohol.

"Buy smarter and cheaper where possible. Continue to innovate with more earth-friendly products while meeting customer's requirements for the future."

"Cutting back on employee hours, switching to different materials and suppliers, putting capital equipment and prepress investments on hold."

"Stay as lean as possible in the front office and on the manufacturing front. Overtime with workers is another thing you have to watch closely and reduce. Also, you can try to re-negotiate terms with vendors, insurers, etc., to help reduce costs."

"We are being very aggressive in prospecting for new business and identifying new markets; putting very strict expense controls in place; and protecting our cash."

"We are paying down our existing debt as quickly as possible, incurring little, if any, new debt, and working to ensure a strong balance sheet. By focusing on a healthy credit rating and limiting our need, we believe we'll maintain access to the lines of credit needed to not just survive, but to look for opportunity in the times ahead."

"Continual improvement is the name of the game. It doesn't change with a slowdown. Good employees are hard to find, so even when things are slow we keep everyone on. We put an extra effort into keeping inventories low to protect cash. Good solid companies that run lean when things are very strong can weather these difficult quarters. Although slowing down, sales will still be way ahead of 2007, and we continue to invest in new equipment and product lines to build for 2009 and beyond. However, we think long and hard about any additional debt that may be taken on, and we always pay down existing debt as fast as possible."

"We are looking at all discretionary expenditures closely, including capital assets, contributions, etc. We are actually spending more on marketing and lead generation, and just recently we hired a new outside sales person. We are watching the cash flow closely and will make any necessary adjustments to keep our company healthy."

"Lean manufacturing, cost reduction, resource consolidation and limited capital purchasing are the main factors. We can't coast and let our competitors pass us by in technology, but we also have to take a very close look at any upgrades and/or new purchases and quantify the benefits. During this time, increasing profit is more about cutting costs than raising price."

"We have cut back hours in the finishing department, which has caused one person to resign. That person will not be replaced. We have also not replaced a customer service person that left in July, but rather we are cross training a prepress person to help with the phones and do more marketing related tasks. Also, while we are slow, we have a backlog of projects that will help us when the economy does pick up. We are cleaning, organizing, discarding and recycling unused and obsolete equipment and tooling. Part of this has led to a recycling focus that has allowed us to be awarded a 'Green Certification' by our local county office of sustainability, so we are trying to make this a positive and move forward as a stronger company."

"Our CFO is checking every expense, even mine. As a president who comes from the sales and marketing side, I like spending, so we have removed a lot of decisions from me. We are analyzing our office expenses and our marketing expenses, and asking everyone to be very conservative. Unfortunately, we added some employees last year as we anticipated our growth, and since we are flat we did lay a few people off. Of course we hope to hire them back."

"We are looking at every expenditure with a fine-toothed comb. We are beating all of our vendors as hard as our customers are beating on us. We are planning for growth and contraction in the same meeting. And we are treating our customers like a piece of gold and holding on to them like it's the last piece of gold, or more important, the last drop of life giving water."


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