L&NW's 2011 Mid-Year Economic Report: 'Challenging, frustrating and rewarding'
Our industry, it appears, is beset on all sides by the dragons of challenge. We are not alone, of course, and we are not among the worst of the sufferers, but sometimes it seems that the challenges have grown larger and more numerous of late, and we are battling ever more fiercely against the demands of suppliers, customers, marketplace conditions, and the business world in general.
Here's a list put together by Thomas Moyer, president of Western Shield Label, that identifies many of the challenges concisely:
"Rapidly rising costs, declining average order size, tightening of cash at every level (customers, vendors, investors, banks), demand for quicker turnaround, a leveling of the playing field in terms of quality or perceived quality, rogue pricing from competitors fighting to stay afloat, a younger workforce with a totally different set of skills, needs and values, increased adoption of formidable substitute products to pressure sensitive, the move from printing as an art to printing as a science, just to name a few."
Not to mention consolidation among converters and among customers, increasing commoditization of labels, and the threat of global competition. By far, the subject that comes up the most, and often with a bit of head-shaking, is the multiplying increases in label materials and the effect that these are having on profits.
Not to be overlooked in this storm of challenges are the opportunities – and there are many: helping customers to find more productivity in their packaging operations, improving the bottom line through implementation of Lean Manufacturing or other continuous improvement practices, cutting costs through development of green solutions to internal waste problems, establishing joint ventures or investing in operations elsewhere in the world to meet the competitive challenges, and exploring fascinating new niches.
As we do in every July/August issue, we present the opinions of several thinkers in the label industry whom we invited to ponder the state of their businesses and the industry as a whole at the midpoint of the year. Five converters, all presidents of their companies, have spoken: Kirk Icuss of Consolidated Products Inc.; John McDermott of Label World; Thomas Moyer of Western Shield Label; Kurt Walker of tesa Bandfix and the new president of FINAT, Europe's label association; and Art Yerecic of Yerecic Label, and chairman of the Tag & Label Manufacturers Institute.— Jack Kenny
Kirk Icuss, President
Consolidated Label Products, Knoxville, TN, USA
There have been many challenges in recent months as raw material suppliers continue to press for increases while, at the same time, our customers are battling their own cost issues and looking for savings. Our value to our customers is in delivering productivity and savings. Even as a Lean company it is impossible, at some point, to offset the pattern of material cost increases that we have seen. This is definitely the top challenge that we continue to battle.
Our business is dependent on a strong domestic manufacturing base. Our customers are working hard to retain their customers and to not lose them to foreign competition. It is our job to help them succeed. One of the positives that has resulted from this economic downturn is that many of our top customer/partners are paying much more attention to the details related to the "cost of use" of the products we supply rather than simply the purchase costs. This gives us more opportunity to find productivity for them within their organization. We spend a considerable amount of time on their production lines and with their industrial engineers and Lean managers. They value us as a resource in that regard and it results in stronger relationships for us.
As always, customers want the most for the least. That really hasn't changed in the 23 years we have been in business. However, "the most" is much different now than when we began. To meet today's market demands it is necessary to continue to push the technology envelope with equipment and systems, which requires significant investment.
TLMI has been a great resource for us through these times. I enjoy and appreciate the support of the organization and its members. The technical meetings are very beneficial to our operations people and keep us in tune as the industry evolves.
John McDermott, President & CEO
Label World, Rochester, NY, USA
The label converting business continues to be a challenging, frustrating and rewarding place to be as our economy sputters its way to an eventual recovery.
The industry has a large amount of excess capacity as surveys indicate that many of the smaller operators run only single shift operations and only the largest converters operate highly efficient, round-the-clock operations. So most operators are always looking for extra volume. Indeed, anecdotal evidence also suggests that some of these operators are emerging from the recession in weaker financial condition. This leads to downward pressure on prices as many owners are willing to cut prices to gain volume or even maintain existing volumes.
On the buying side, large print buyers continue to find more and more creative ways to commoditize their suppliers, thus feeding the worst trends. In our business we have seen fewer online reverse auctions recently, but this does not mean that buyers aren't still on the prowl for ways to drive down their costs as much as possible. We had a recent large prospect who, over a period of several months, put us through a seemingly endless number of quotation requests to ascertain the strong and weak points of our operation against their current suppliers. They wanted to know how they would divide their business by substrate, size of label and length of run to optimize their sourcing. That was a relentless buyer!
And well might our customers need to be so, in the light of the blizzard of price increase letters coming through from material suppliers this year. Higher oil prices are driving increases on the film side, while supply constraints are driving increases on the paper side. Label converters can roll many of these price increases into their ongoing repricing of custom jobs. But it is much harder to do so when fixed price contracts are in place with brand owners. Those discussions can be even more difficult if the customer's business is still not fully recovered from the recession.
Finally, the industry is getting more competitive as a result of new technical innovations and investment. More and more volume work is migrating to wider press widths in order to raise throughput and minimize run times. Runs that may have been competitive a few years ago on 10" presses are now running on 16" or 18" presses with multiple color stations. Investments in Lean processes and servo driven presses are collapsing set up times and waste, adding more stress to the competitive environment.
These pressures have caused us to look outward to find opportunities among the challenges. Like many other converters, we have decided to move up the value stream as a way to avoid commoditization. This leads us to several related moves:
Create new, more complex products and capabilities that command higher prices and margins
Raise quality and delivery levels to meet or exceed rising customer expectations
Identify and solve customer problems with solutions that create customer satisfaction and loyalty
One of the problems we hear about more and more is the need to achieve corporate sustainability goals, which, in turn, are driven by rising consumer and retailer awareness. As a certified participant in TLMI's LIFE initiative, we have numerous opportunities to help craft individual solutions that meet our customers' needs.
Another problem buyers have is the need to reduce inventories and manage an ever increasing number of SKUs. We have found buyers responding well to the benefits of digital printing, which enables shorter print runs and lower inventory costs without sacrificing quality.
Overall, we are seeing more upside opportunities as long as we listen to our customers and continue to sweat the details in our response.
Thomas Moyer, President
Western Shield Label Co., Rancho Dominguez, CA, USA
When I think about the economy, I immediately think of people, human emotion and our frequently irrational behavior. Hope, fear, greed, denial, anxiety, pride, nostalgia and, in large part, goodwill seem to drive all of us in some way. In recent years, so many of us thought we could buy a house on stated income, no money down, and be guaranteed that property values would grow exponentially. And many in the financial community were complicit (some say culpable) by spinning that fantasy as a reality. I've been around the label business since 1992, and I remember the days when it seemed like every label converter was highly profitable, growing, and had a feeling that there was enough to go around for everyone. And there was! Some of us, myself included, long for those days to return. As I see it, our industry faces a perfect storm of challenges that will make this an exciting, albeit highly competitive time, for a long time. Heck, maybe for good.
Here are the challenges we face at Western Shield, and I'm sure that these are not unique to us. Rapidly rising costs, declining average order size, tightening of cash at every level (customers, vendors, investors, banks), demand for quicker turnaround, a leveling of the playing field in terms of quality or perceived quality, rogue pricing from competitors fighting to stay afloat, a younger workforce with a totally different set of skills, needs and values, increased adoption of formidable substitute products to pressure sensitive, a move from printing as an art to printing as a science, just to name a few. In addition to these pressures, our company's growth has brought us to an inflection point that causes problems for a lot of companies. We're approaching 50 employees and about $10 million in sales, and the increased stress on the system is revealing the many weaknesses in the people (including me) and systems that "brought us to the dance." A perfect storm, baby!
As I consider the opportunities this economy offers, I return again to people. The extended downturn has created a buyers market for employers looking for new talent. In our organization, we objectively rate all our employees in terms of performance on an ABC scale. "A" players are going to help us weather this perfect storm. We challenge, reward, train, promote and then challenge these employees again. "B" players are solid contributors that might need some focused training or a lateral move. "C" players are the anchors that will bring down organizations. In the culture we're attempting to foster, they usually make their way off the ship organically. In each case, we're always looking for opportunities to allow our employees to shine, to do what they do best. The "A" players we've hired and developed are helping us with both strategy and execution. To offset raw material increases, we're utilizing employee talents in Lean Manufacturing and Six Sigma to reduce waste, improve throughput, and streamline systems. To respond to the lead time issue, we've applied SMED principles to improve our changeover process, systematized our ink matching methodology, and revamped our scheduling process to batch better. We also are doing a lot more make-and-hold with customers (along with solid written agreements).
To deal with rogue pricing and price increases to our customers, we're communicating. Coaching our salespeople who are delivering the unfortunate message, and talking with customers about the realities of inflation and the options they have. Always tricky. I also am personally reviewing almost every quote that goes out the door, making sure we're using well thought-out market-based pricing, not simply cost-plus.
Because cost cutting is not a path to sustainable profitability, we've also been aggressive on the top line. We've made investments in technology and people to appeal to those who do their buying online and might be more comfortable with a text or instant message than with a phone call. Our managers have also gotten out from behind the desk and done a lot more market-facing activities. This has improved job variety for these managers, and also created customer "touches" without the additional expense of a salesperson. We are also focusing our collective brains on what the next best investment would be from a production standpoint. Is it HD Flexo, digital, shrink sleeve, flexible packaging, folding carton, or some form of vertical integration? This all depends on where we see the market heading and how our current customers and core competencies support that direction. Since acquisitions are probably the most efficient way to grow revenue, we have tried to maintain open lines of discussion with our friendly competitors around the country. And more important, we strive to have a reputation of honesty, integrity and humility that would draw an owner to consider us when ready to move onto greener pastures.
As a result of some of our investments and rising prices, our sales are north of 2010 by about 10 percent, but profits are down about the same amount. Fortunately the 2nd quarter has shown significant improvement over Q1. As a team, we'll have to work smarter and harder to produce results that came easy just a few short years ago. Denial and nostalgia are the human tendencies we're trying to avoid in this downturn. For the flexographic label converter, like most domestic manufacturing, the "cheese" is moving or has already moved, and may never come back. We are trying to accept that reality and proactively head out into the maze of uncertainty with the best group of dedicated employees, vendors, and partners we can assemble.
Kurt Walker, FINAT President
CEO of tesa Bandfix, Bergdietikon, Switzerland
For many years, self-adhesive materials have represented about 50 percent of the total label market. The growth potential for self-adhesive remains significant. Since the economic crisis in 2008-2009, volumes have returned to pre-crisis levels and the industry anticipates growth in the years to come. Self-adhesive labels will continue to play a dominant role, offering more materials, adhesives, inline printing and converting opportunities than any other type of label.
The Fraunhofer Society, a German research organization, refers to double-sided self-adhesive as "the fastening technology of the 21st Century." This indicates a major shift from pure decorative solutions to add-ons, i.e., "sticky" applications in new markets, including automotive, construction, electronics, and more. For example, not one screw has been used in the assembly of Apple's iPad. For label printers who can diecut, this provides a fast, easy and profitable way into new industries.
In addition, there will always be emerging technologies, such as the current growth of digital label printing technology, which we embrace. Collaboration and commitment to meeting common needs, initiatives and standards is what is driving FINAT's agenda, not the technology as such. In the end, all technologies will only improve the end product, either individually or combined.
One of the challenges our industry needs to address is to remain competitive in a globalized world. The globalization of the label industry is driven by the needs of multinational brand owners who demand a uniform design for their products and labels worldwide. Traditionally, the label know-how and expertise has been based in Europe and the USA. That is why the majority of the international operating label converters are located in these regions. The label industry is de facto still dominated by family and privately owned companies. There is only one viable and affordable way for them to enter into new markets and be able to serve the industry globally, and that is through partnerships or joint ventures. These provide for a win-win situation and a faster return, as they can not afford big investments to start a new business from scratch. The challenge is to grow, to remain competitive, profitable and in control. It is my conviction that despite the presence of big international players, even with the most advanced technologies, there is a great future for the majority of the smaller, regional converters. They are the last part of the value chain, and the production of labels needs to remain close to the end users. A regional presence guarantees greater flexibility, faster/JIT delivery and personal customer service.
Another concern is the whole greenwashing practice in our current economy. Many industries and individual companies pretend to being/becoming sustainable, but I believe we all still have a long way to go. I am launching an urgent call for action to our industry in particular. Sustainability is high on the FINAT agenda, and both end users and label converters are responsible and need to join forces to implement a recycling program. There is literally no time to waste. We at FINAT promote and encourage existing recycling programs, and my personal fear is that if we do not execute fast, complicated legislations will be imposed, resulting in further delay and missed opportunities.
Innovation has been the theme of our recent congress. I believe one of the most innovative approaches in running a current label business lies in the implementation of a greener, cleaner, responsible and truly sustainable recycling program.
Art Yerecic, TLMI Chairman
President of Yerecic Label, New Kensington, PA, USA
Industry growth: We are pleased to report that TLMI converter members participating in the annual Ratio Study grew sales at a double digit rate in 2010. Smaller converters struggled to grow sales during the recent recession but rebounded strongly in 2010. Over one third of converters reported adding staff in the first quarter, according to the TLMI Quarterly Trends Report – a strong show of confidence.
Consolidation among competitors: An uptick in M&A activity should be expected as converters who launched their companies in the 1980s and '90s begin to look for exit strategies. Also, capital investments made by successful converters during the recession and after will continue to pay dividends and bring a competitive advantage to those companies that have fared well. This will increase the stress on weaker converters caught in the profit squeeze of higher supply chain / operating costs and customers pushing for lower prices.
Consolidation among customers and markets: Consolidation is a reality we all face. While we can't change the business cycle that's driving consolidation, we can continue to look for specialized business opportunities. Developing these niche areas can often play a key role in profitability. The ideas for these specialties can often come through networking with suppliers or other converters at industry meetings.
Increasingly demanding customers: Converters enjoy a great deal of loyalty from their customer base. The October 2010 TLMI Index and Trend report indicated that loyalty to vendors is still high among label sourcing personnel with 63 percent of participating end users indicating that they plan to stay with their current label vendors. 34 percent said they planned to put some business out to bid, and only 3 percent planned to put all of their business out to bid. I believe these results indicate that converters are largely successful in meeting the demands of their customers.
Rising material costs: The margin squeeze converters are currently experiencing is a challenge that's not for the faint of heart. Converters must partner even more closely with suppliers to find ways to minimize supply chain costs.
Waste reduction is critical to remaining competitive in this market. Fortunately, there is a broad based industry focus on eliminating waste. Equipment that allows converters to limit the number of splices by using larger rolls is available at very reasonable costs. Labelstock suppliers have larger size rolls in stock - currently up to 20,000 foot rolls. Flying butt splicers are a great way to eliminate stops for roll changes. Turret rewinders also help minimize waste.
As an industry, we need to remember that the definition of waste is anything more than what's absolutely essential to produce a product that conforms to the customer's requirements.
Greener Solutions: Converters have a real opportunity to differentiate themselves by pursuing more environmentally friendly business practices and products. TLMI launched LIFE (Label Initiative For the Environment) to give converters and their suppliers a low cost vehicle to drive their businesses and products toward more sustainable solutions. LIFE brings transparency to the marketplace for retailers and brand owners. There are currently 25 TLMI member locations that are LIFE certified and another 10 in process.
While most market segments aren't willing to pay more for greener products or suppliers, just about all are interested in learning more about cost neutral or cost savings opportunities. Our industry is gaining traction in key areas like liner and waste recycling. We must continue to work together to reduce our impact on the environment.
Lean Practices: As our industry moves increasingly from art to science, converters must refocus on what drives profits. Turning orders into dollars as efficiently as possible will bring continued success. Lean Manufacturing has been on the agenda at every TLMI Technical Conference since 2005. Once again, the 2011 conference will feature Lean Manufacturing as an opening day session. While converters have made much progress since the turn of the decade (when Lean was virtually unknown in our industry), there are still many cost savings opportunities. Lean is a continuous improvement journey that pays dividends at each stop but never arrives at its destination.
Management Practices: I believe converters that adopt and execute best practices will always succeed. Here are a few best practice questions we should ask ourselves:
Are our strategic plans in writing? How far out – one, three or five years? How well have we integrated our sales planning with operations? Have we communicated the strategic plans to the sales and management teams? Do our teams undertake specific initiatives that will lead to the success of the strategic plan? How often do our sales and management teams report on progress? Are we benchmarking our business versus the industry? Where are our biggest opportunities for improvement?
Growth of digital printing: The last several years have brought a dramatic increase in the number of digital print system manufacturers. UV inkjet technology has received significant interest. Digital will almost certainly continue to grow, but recent advances in automatic print and registration servo technology in conventional flexo presses will pressure digital's place in the market. There are a growing number of digital trade shops that provide an excellent way for converters to enter this market as resellers without investing in digital presses.