Commoditization and pricing challenges have converters seizing growth opportunities, positioning themselves as more than just suppliers.
For three years, conversations about the economic state of the industry have revolved around the “downturn.” Today, however, we’re hearing more about recovery than crisis (at least outside of Europe), and businesses in many sectors of industry are shifting from “weathering the storm” to being “cautiously optimistic.”
Clichés aside, the label industry has proven itself to be fairly resilient. The industry’s buzzwords of the past several years have now become steady drivers for growth – digital printing, sustainability, Lean Manufacturing, globalization and innovation. Profitable converters have become very good at leveraging the above into the manufacturing of value-added products, often times making inroads in becoming a “supplier-partner,” and a brand in and of themselves.
Of course, challenges remain. Commoditization and rising materials costs are major concerns, and meeting label customers’ perpetual demands for faster turnaround and lower prices have converters honing their expertise, adding assets and ramping up marketing efforts.
For Label & Narrow Web’s annual mid-year economic report, we’ve invited label company leaders to share their opinions on the state of their businesses and the industry as a whole. The following is a view from the president’s desk about the overall performance of their label business so far this year, and where they’re heading into the future.
This year has definitely been a turnaround year for both the economy and for Label Impressions. We’re seeing solid growth in both the top line and bottom line, and feel that most of this is the result of the hiring choices, training and hard work we put in during tougher times in 2009, 2010 and 2011.
While the tougher period from 2009 to 2011 forced us to pull back on R&D projects, we’re happy to say we’re back to adding new capabilities and testing new concepts, materials and processes. Becoming an alternative resource for folded booklet and coupon labels to the trade – other label printers, offset printers and savvy print brokers – is an important strategy and we feel that producing unique and interesting products for these partners to offer their clients will contribute to our future success.
Sustainability continues to be a cornerstone of our success, and although “staying the course” during the economic downturn was challenging, it is now paying off. Getting on the green bandwagon isn’t something a label or package printer can do overnight, so while our competitors play catch-up, we’re able to forge ahead with new eco-friendly materials and processes.
Foreign competition seems to have slowed, which has been a surprise for us. Strengthening overseas economies, reduced inventory strategies fueling the demand for shorter lead times, along with quality and safety concerns from customers of overseas manufacturers has brought many customers and prospects back to the US for their label and packaging needs. Certainly a significant amount of printing is still being done overseas, but at least at our level we’re seeing a lot of these customers come back, citing fast turnaround, quality and service as their reasons for working with a US supplier.
All of this said, competition/low barrier (cost) to entry, increased costs and customer pricing pressure continue to challenge us and we need to adapt to stay competitive and profitable. We expect to continue growing our top line through the balance of 2012 and beyond but need to stay focused on cost-cutting through careful purchasing and Lean initiatives.
Perhaps the most challenging trend we’ve seen emerge has been the demand for shorter lead times from customers across all industries from personal care to food to industrial labels. Throughout 2010 and 2011 we saw a significant lag between the time we quoted a customer and the time the customer placed an order. This lag has dramatically decreased, however we’re still seeing a lot of time urgency from all of our clients. Once an order is placed, most orders are “rush” orders and reducing that lead-time while keeping costs down has been an important challenge. Our focus on Lean Manufacturing’will be important in helping meet our client’s needs for the balance of 2012 and beyond.
In many ways, 2012 has mirrored a roller coaster ride. We started off flying down a hill, with strong sales growth at the beginning of the year. Suddenly, the train slowed dramatically. It felt like a never-ending uphill climb as Q1 ended and Q2 began. We meandered along with little to no growth. In May, the train began picking up speed – sales activity and growth began increasing. I expect the ups and downs to stay with us for the foreseeable future. I think consistency in the overall economy and our industry are a long way off.
I believe there are multiple growth opportunities in the label world. We all lament being commoditized and beaten up over price. We need to provide solutions that add value, either from the marketing side or operational side. We have seen significant growth in our value add products - linerless, integrated labels, digital labels and tamper evident solutions are good examples. The sales process for these products takes longer and requires more persistence and certainly more expertise on our end. We must demonstrate value above and beyond the cost of the label. If we aren’t focused on the value we add, why would our customers focus on it?
I expect consolidation in our industry to continue, as companies turn to acquisitions to acquire talent, customers and capabilities. Our industry still has overcapacity. Our customers have gotten larger and demand more and more from us every day. Only well-capitalized companies will be able to meet those demands. Over time, consolidation will solve the overcapacity issue and allow the survivors to invest to better service customers.
CPG’s and retailers are being cautious about the economy, looking for value, and trying to find ways to differentiate their brands. But that’s not necessarily bad news, and I think that sets the stage for a lot of growth for narrow web printers, especially in digital.
The advantages of digital fit the current economic climate. Shorter runs, less start-up cost because there are no plates, no need for press runs – it’s all about efficiency.
The technology around digital is also exciting. The most exciting thing: where is Benny Landa going? He invented the Indigo, the guy people call the Steve Jobs of printing. Now his non-compete clause with HP is ending, and I think over the next five years, Landa’s Nanographic Printing technology could change the landscape of printing the way the Indigo did.
Technology and machines are one thing – but the other part of the equation is the people. We spend all day making labels to promote our customers’ brands. We in the printing business need to remind ourselves that our own companies are a brand, too. There’s a consultant named Sally Hogshead who talks about the opportunity for a brand to fascinate people – not just convince them, but create an emotional connection that draws them to your brand, draws them to your label company.
The status quo is to create a premium product in terms of labels, but the trend should be also to create the company as a premium product. The premium product is the people. It’s what delivers the experience when the customer says, “I didn’t know that’s what I needed, but you answered the questions I didn’t even realize I needed to ask.”
We’re still going to have pressure on our profit margins. We’re still going to have pressure from materials costs. We’re still going to be dealing with consolidation among our customers and our competitors. So the only way to survive in that environment is to be awesome.
One of our foremost challenges today is the increasing pressure on our ability to maintain reasonable profit margins. Despite the escalation of material costs and freight costs, end users are asking us to stabilize or even reduce our prices for labels and labeling equipment. We value our customers, of course, and we do understand that they, too, are examining ways to reduce their own costs. That’s the reason we work so closely with our customer-partners to agree on mutually-beneficial solutions that can add value to any labeling challenges that they face.
One way that Weber is addressing cost escalation also has a green component attached to it. In 2011 we began baling our label waste and selling it to a firm that transforms the waste material into fuel pellets. It took a small initial capital investment to start the program, but our waste removal expenses have plummeted as a result – and we’re reducing our contribution to landfill as well.
I do think there is room for plenty of optimism in the labels and labeling business, even in this slow-to-recover economic climate. For example, we’re looking at innovations like linerless PS labels and labels that are heat-activated. These kinds of advances are exciting and can literally transform our industry.
But we’re not just waiting for technologies to emerge. In the meantime, Weber is developing label products that focus on brand security issues, including microtext, indestructible label materials and holographic images. And, of course, we’re very interested in adding to our portfolio of materials aimed at addressing the sustainability concerns of our customers and their consumers.
I’m also excited about the growing capabilities of digital label printing systems: bigger frame sizes, faster production speeds, more on-press and off-press finishing options. But we’re also keeping up with the latest developments in flexographic printing at the same time, because flexo remains one of the best, most economical ways to print the type of high-quality labels our customers require.
In addition, we’re busy designing, engineering and manufacturing new and improved label application systems. This year, for example, we’ll be introducing an all-new line of label printer-applicators, including systems that will feature all-electric operation.
TLMI converters continue to succeed in growing their businesses. The 2011 Ratio Study report showed good sales growth in all size classes and particularly strong growth among the medium and large converters. Sales increases among all participating companies averaged 5% over the last five years. This is particularly impressive considering the recent recession/recovery and the maturity of the North American market. Automation is delivering a sizable advantage to converters who make the investment. The reductions in setup waste and increase in uptime are helping converters continue to find ways to make money in this challenging business environment. Those converters who aren’t able or willing to make these investments will find it increasingly challenging to be successful.TLMI’s Label Initiative for the Environment (LIFE) certification program gives converters and suppliers an easy to implement tool to make our businesses increasingly sustainable and meet the changing requirements of all of our key stakeholders.There continues to be real opportunities to partner with suppliers and find ways to keep our material costs in line for our customers. Flexible dies now make testing thinner constructions much less expensive. Thin facesheets and liners improve our environmental footprint and help our customers meet their cost objectives.
How will we continue to be successful in this challenging market? That’s the question that each of us face on a daily basis. Two opportunities come to mind for me. The first is standardizing our work. I had the opportunity to visit a Toyota factory in Japan earlier this year. Lean techniques were evident everywhere. Not one process or activity was left to chance – it was all standardized. To what extent do we follow this discipline? We take the quest for profits into our own hands when we drive out costs through standardizing. Standardization is at the heart of Lean Manufacturing.
Secondly, I think about what methods we use to learn how to improve. The answers are seldom found within the four walls of our own facilities. It’s when we venture out among our customers, prospects and peers that we really learn. This year we have a great learning opportunity at Labelexpo Americas – both on the show floor and in the educational sessions. TLMI converter and supplier members can network and learn at the upcoming Annual Meeting in Naples, Florida. We have found the time and money investments to attend these events are small compared to the returns.
Suntory, a major Japanese beverage company presented an end-users’ perspective to the L9 delegates at o––––ur recent meeting in Japan. One of the surprising things we learned was the intense focus the Japanese consumer has on the recyclability of labeled products. If a product label cannot be easily removed or contaminates the package resulting in an inability to recycle, the consumer will not continue to purchase the product.These views are far more developed than we currently find in the North American market but we would do well to pay attention and move our product lines in this direction.
Rising materials costs represent an ongoing battle for the converter. The downward pressure from the end-user never goes away, so keeping costs in check is a challenge. We have already seen one price increase this year due to rising raw material costs and have been alerted there will be another. Our goal is to negotiate what we can, but also look for ways to continuously improve the operational efficiencies of our production process to reduce waste and keep margins intact.
The commoditization of products is an area that we are always trying to guard against, especially in digital printing, as press installations increase and new technology is introduced. We believe digital printing is a high value total product, lifecycle solution, with a positive impact on the supply chain and how consumer product brands can go to market and even develop new business models. Historically, converters who have invested in digital tended to slate it as just a short run solution, so the danger exists for it to become commoditized and not reach its full potential. The marketplace has changed.
Consumers expect high levels of engagement, relevance and interaction from the brands they buy. From our perspective, this is one of the greatest times to be in product decoration, as the package has really been elevated in the marketing mix. Converters need to think differently about their business and their approach to the market if they want to deliver against these new market realities.
Our business has seen solid growth across all industry verticals that tend to have a long-life product identification focus in more industrial and capital goods markets. Nine of our top 10 accounts are up over 10% in the first 5 months of 2012. We have enjoyed 28 years of reliable growth thru selective client acquisition and intimate client engagement.
In regard to consolidation among customers and markets, we have had occasional impact in the loss and gain of business (revenue) when key accounts merge or acquire companies – more often than not our past quality, delivery performance and technical design excellence have afforded us growth when these events happen.
We are routinely put in a position to use our materials knowledge to help minimize performance failures, provide more effective inventory management, look to long term cost reductions and help distribute to broader locations.
As a Top Workplace Winner, we continually struggle with world class comp-incentives-benefits verses the impact on the selling price – freight and energy are an area we do well with as sustainability efforts are going very well for us.
When it comes to commoditization of products and services, we are seeing some serious “lack of appreciation” moments with a few of our key accounts. Years of effective optimizations is old news, and as we all know, it’s still a “what have you done for me lately” position that can frustrate the relationship.
As a company that has generated seven new patents in the last two years, we focus on the value of relationships with companies that use our skills verses bid on “like work.” There have been a number of expensive trials that did not work out but our bias for innovations includes acceptance of failure.
We have supplied at least four new items this past year that include a security component, but have not made this a key center of focus as has been done by a number of others. We feel this, like RFID, will continue to broadly deploy and allow us to pick and choose our niches. For example, our dome technology compliments our digital product offering and we intend to continuing our investment in digital print and converting.