The recession, disturbing as it might be, is not the whole story. For the past several years, the narrow web convertingindustry in North America has been embracing new technologies and proving that they work – servo presses, digital presses, digital plates, and the like. Converters are welcoming sustainable practices and continuous improvement methodologies and showing that these are indeed fruitful. They have been growing by design, shrinking by design, fighting for business like never before.
The industry has evolved most dramatically in the quality of its printed and converted products. "It's not the same as it used to be. I have customers holding me to offset standards for flexo," says Thomas Dahbura, vice president of Hub Labels, Hagerstown, MD, USA. "Our standards have gone up, and customer expectations have increased."
During this decade, film labels have made strong inroads into the markets where paper had been king. Chief among these has been the surge in shrink labels in beverages and foods. Growth in traditional pressure sensitive labels has been low or flat recently, and the adventurous converters have pursued various niches to distinguish themselves and to create a hedge against future declines.
"We have added two new capabilities: shrink sleeve and the ability to print UV curable inkjet inline on a flexo press," says Sandeep Lal, president of Metro Label, Toronto, ON, Canada. "Inkjet is a challenge, because when you add a new capability it is a function of how well you execute it, with your sales team and your strategy, but also how the marketplace, your customers and your competition perceive you. The biggest challenge has been the price competition; it has been the most brutal that I can remember since the early 1980s."
Mike Erwin, president of Tailored Label Products, Menomonee Falls, WI, USA, says that his company has increased its activity in medical and automotive markets, "and more markets that have a higher quality control requirement. We have an innovation growth pipeline of identified growth projects, which at their run rate would cause a doubling of the company in the next 36 months," he declares, adding, "They are across all different markets and fields. Most will have some sort of patent or joint venture structure to them. Seventy-five percent are under way right now, either in development, tooling or deployment. Five of the 21 projects are being addressed but are more in the blue sky mode: market research and partner development.
"We have a very developed R&D process, on the back of a system called Eureka Winning Ways, a consulting capability developed by one of three guys who were on the 'American Inventor' reality TV show. We hired him to train a dozen of our people to become our idea group, our development execution group," Erwin says. "Our tag line is 'Passion for Innovation', and we have to train our crew to be that way. We don't bid on large label contracts. We work on developing proprietary pressure sensitive applications, usually tied to some kind of long term product relationship with a client."
Suppliers have taken note of the narrow web industry's move into niche markets. "People who have focused on wine labels are getting deeper into it. The same is occurring to companies that have developed expertise in self-adhesive food labels, freezer labels, and other specialized areas," observes Ian Hole, vice president of market development for EskoArtwork. "Much of this is due to consolidation. Some of these companies have become experts in certain niches. When they see an independent company that can add to that expertise, they buy it."
"It's hard to change on a dime," says John Hickey, president of Smyth Companies, St. Paul, MN, USA. "A lot of companies are dependent on a handful of good customers. Others have gotten out of pressure sensitive altogether and have moved into unsupported film. Some are changing, some are not. A niche lasts for maybe three years, and after that they are all coming at you. You have three years before you have to move onto something new, and you have to have the resources to go about that – the scale, the resources, and the assets in place."
Other converters choose to invest not so much in niche markets but in strengthening their position in markets already served. "We haven't really focused on a niche area," says Nick van Alstine, president of Macaran Printed Products, Cohoes, NY, USA. "A lot of our investments have focused around increasing our ability to serve our markets. That's why we have capabilities such as combination printing and computer-to-plate technology. We differentiate ourselves through the intangibles, the business experience, if you will. Most of our customers will tell you it's superior."
In some companies, changes during the second half of this decade have been dramatic, such as those engineered by Hub Labels. "We hit a boom period a few years back when we were twice our size, working 24/7, but the top line was shrinking," reports Dahbura. "We decided to focus on a healthy business environment, meaning the bottom line. We couldn't sustain that level of growth.
"At some point a business can get too big, especially in a single plant, and becomes difficult to manage. So we picked and chose the customers that we want to do business with. Our business has gotten smaller, but we are a lot healthier than we were."
The price is wrong
North American converters, like their counterparts the world over, have been cramped by rising costs of materials, especially since the price of fuel began its escalation. Passing such increases along to customers has been difficult for some, nearly impossible for others. Customers, in fact, want prices lowered.
"Quite frankly, no customer will take a price increase that is not material related," says Jeff Dunphy, president of Design Label Manufacturing, East Lyme, CT, USA. "It's not that difficult to pass along if there has been a material increase for legitimate reasons. But people are still asking for price reductions."
"We have had a lot of difficulty passing along price increases," says van Alstine. "That has to do with the number of players in the market, and our customers have to keep their costs down. We have had some large customers say no. In the past two years it was easier than previously, but we were not able to pass along the same level of increases that we received. Prices for materials went up industry-wide somewhere in the range of 11 to 15 percent. We are able to pass on some portion of that, so we have seen eroding profits. Even though we are employing every kind of Lean Manufacturing technique that we can employ, it's hard to assess the full impact of it."
"We have had prices frozen for two years," says Erwin. "We have contracts with some customers where we have to provide year-on-year reductions, working with the client to define and reconcile the differences. We have to figure out ways to save money behind the scenes to offset that."
John Hickey says that increases must be passed along. "Larger companies have professional procurement folk who have to have evidence to show to the higher-ups. So we have to be prepared to show what component of our pricing is rising. It depends on who your customers are. They will want to know the total applied cost, the issues in the plant, the substrate you are using, are you on time or not. There are a lot of different ways to save money."
"This comes down to margin," says Sandeep Lal of Metro Label. "You have players in the game with less discipline than others, and to them the competition was never meant to be fair. If they are successful they create carnage and they succeed. We all want to see discipline in the system, but they will create opportunities for their business at the expense of others."
Competition is the biggest challenge in the view of Ian Hole. "It is a very, very competitive market. The biggest challenge for small companies is the ability to provide competitive pricing and service. Larger companies are always concerned about price competition."
From Hickey's perspective, competition is not as tight as he has seen it. "What has changed, though, is the amount of opportunities out there because of the lack of growth in North America. The growth is in the low single digits and maybe not at all in some market areas. That has changed the competitive landscape to a degree."
Here's Thomas Dahbura: "I love when price increases come, because it allows us to knock on doors of customers that have not been receptive in the past. We pass them along. When paper is 50 percent of the cost of your job, you have no choice but to pass it along. Some customers want letters that say we have had a price increase."
Dunphy weighs in with another observation about competitors and customers: "Competition is fierce, but a good portion is uneducated, people who quote things that they have no business quoting and they can't do the work. There is a lot of confusion on the buyer's part as to who is capable and who isn't. Unfortunately, price is the main motivator these days. In a lot of cases the main companies buying a good volume of labels are constantly rotating purchasing people in and out now, and dumping the responsibility onto the shoulders of people who don't have an idea what they are buying. That means we have to be more of a consultant on the sales end. Larger companies see the purchasing function as a step on the ladder of their chain. So a person will do purchasing for six months and move up. It doesn't help them, and it doesn't help us. They are making a lot of bad decisions these days."
Ten years ago the industry was predicting a rise in acquisitions. It began slowly and grew steadily, and by the middle of this decade the activity was constant. Every converter was fielding enquiries from potential buyers on a weekly basis. Large companies grew larger through mergers and acquisitions. Smaller shops were swallowed up, or did the swallowing and moved up into a new revenue slot. With the economy in a slump, M&A activity has diminished, but it hasn't stopped.
"I still see a fair amount of private equity money in the business. We get calls," says Lal. "Players in other segments of the packaging industry are trying to get into the label industry. I suspect that some private equity players who got in over the past couple of years will lose money if they exit. It will be interesting to see what happens, because when margins are really stretched to minimal levels, they don't meet private equity margins. I think most of them are going to be hard pressed to see their way through this economy."
"It will be interesting to see," says van Alstine. "I have heard that we are going to see some people fall off here. I suppose there are those that have been playing it so close to the edge that they might drop out, or become weakened to the point where they need to be acquired. We used to get offers on a regular basis, particularly from private equity firms. A lot of that has died down."
"I don't think that trend is going to go away at all," says Dunphy. "It's still happening, because I still get plenty of calls. The money hasn't dried up as much as people think. I attribute the profit margin erosion to that. Companies consolidate and have extra capacity, and will fill it for any price."
Until this decade, few voices were raised in the label industry about environmental concerns. Matrix came off the press and went into the trash, to the landfill. Toxic waste in the form of inks, solvents and other chemicals was regulated to one degree or another, but pretty much nobody paid attention to the mantra Reduce, Reuse, Recycle.
Now it's different. Converters exist today who are enthusiastic – and vocal – about their concern for doing the right thing for planet, community, industry, and progeny. It's not happening all that fast, though.
"A few label converters are sincere," says Calvin Frost. "Others are not going to do anything. The change isn't going to occur with the older generation." Frost is chairman of Channeled Resources Group, which reclaims and sells B-grade label stock worldwide. He also heads TLMI's Environmental Committee, and writes the Letters from the Earth column in each issue of this magazine.
Still, a movement is under way and it looks like it's growing. Grand Rapids Label Co., in Michigan, has become the first converter to earn LIFE certification. LIFE stands for Label Initiative For the Environment, a sustainable best practices program developed and administered by TLMI.
"We are pursuing LIFE certification rigorously," says John Hickey. "I personally feel very strongly about the environment. It's good business, both long term and short term. Employees feel proud to work on something that is bigger than themselves."
At Hub Labels, Dahbura says that he is "jumping all over sustainability because it is saving us a lot of money. There are two sides to it: It's the right thing to do, and it's saving money. I love the outdoors, and I don't want to fill up the landfill with waste. And then there is the $30,000 to $50,000 that I will save by recycling the waste. The impact on the bottom line is huge."
The Lauterbach Group, a Wisconsin converter, is moving into a new building that is LEED certified (See story on page 15.), and the company has initiated a range of internal programs to promote good environmental practices wherever they can be implemented.
Jeff Dunphy says that his company also is pursuing LIFE certification. "We see the benefit of this, and we are really excited. Sustainability has been an underlying theme for us, and now this gives us a way to establish it properly. The surprising part is that there is money to be saved by implementing it."
The "saving money" theme set forth by these converters challenges conventional wisdom, which has assumed that making costly changes to promote environmental friendliness will undercut the bottom line. Further implementation of the LIFE program and follow-up by certified converters is expected to provide the impetus for more label printers to join the sustainability movement.
The recession has not helped that movement. The momentum building up by mid-2008 for sustainable practices throughout industry as a whole has suffered while the economic downturn turns everyone's attention away.
The industry will re-focus, Calvin Frost believes. "Which comes first, environmental excellence or survival? If you are not profitable, how can you even consider being sustainable? The first thing you have to do is make money. But what's really interesting about those two is this: You can be more profitable if you meet sustainable practices. If you watch your power, your emissions, your consumption, if you have these standards set up in your company, you are more profitable than if you don't."
A look into the future
When the economy begins its upturn, and eventual recovery, what will be the state of the narrow web industry in North America? People agree that no longer is there such a thing as "business as usual." So what kind of business will it be?
"The label industry will rebound ahead of the economy," predicts Dahbura. "It's going to be a ramp-up, something that precedes the official recovery. For us, the message is that a well managed business can survive in a downturn. You have to be disciplined in good times to weather the bad times."
"The label industry in general doesn't exhibit wild swings up or down," notes Dunphy. "I don't see a huge change." He adds a prediction that "financially unstable companies are going to be washed out. If you came into the recession without a lot of financial stability, you aren't going to make it."
"As with personal and family budgets, converters will come up with a more personal look at their businesses as they relate to debt or other responsibilities," says Hickey. "There will be some psychological revaluation of business models. Naturally, everyone is soul searching, asking themselves how they can run their business differently. I'm not exactly sure how that will pan out."
"There is a need for what we do, a strong need," declares Nick van Alstine. "We live in a nation of consumers. I think that the smart companies are getting smarter and leaner and meaner, so people are finding ways to be more productive with less money. That, to me, bodes well for when things return, in two ways: leaner on the inside and meaner in terms of aggressively pursuing sales. People are training salespeople to be sharper, smarter sales consultants. The days of order taking are over."
What will the industry look like when the recession is over? Van Alstine says, "There will be fewer converters."