Recent feedback from owners of printing and graphic communications companies have led me to reflect on business viability implications of shortages in the paper marketplace.
Over the past several decades, printers have come to rely on and trust that a steady source of quality paper will be available on demand. This assumption has been changed, maybe forever, as a new reality confronts decision-makers across the spectrum of print-centric companies.
Paper supply has recently become a challenge regardless of a printing company’s annual revenues, or whether the company ownership consists of family members, business partners, or investors. “A refrain is now heard throughout the printing industry,” wrote Mark Hahn in The Target Report (See Printing Papers Get Squeezed Out – February 2022 M&A Activity), “paper supplies are very tight, allocations limit the ability to take on new customers, discounts and rebates are a thing of the past, shipments are delayed until price increases take effect, and printing and packaging companies increase paper inventories at every opportunity. The supply and demand curves have crossed, and the mills are in charge.”
According to Mark Hahn, my partner at Graphic Arts Advisors, “There are several reasons pricing leverage has shifted to the mills, including a labor strike at Finnish papermaker UPM, Covid-related supply chain disruptions, shortages of drivers, all in addition to the numerous closures of paper mills over the past several years.
“The paper industry has been chasing falling demand across the printing grades for a couple decades, closing mills, seeking to regain pricing leverage,” Mark wrote in The Target Report. “With the uptick in online purchasing and increased consumer spending across the board during the rebound from the Covid shutdowns, the stage was set for the significant shift in paper manufacturing now well underway. The result is that shuttered mills have reopened, and in the process, transitioned to packaging grades. Underperforming mills are purchased, and the new owners reconfigure the paper machines away from printing paper grades and to containerboard or kraft papers. Paper making operations are large and capital-intensive; the moves are major sea changes and will not be easily reversed. The result will be tight supplies of printing grade papers for the foreseeable future.”
Leading Companies Will Pull Ahead
One can view the current paper situation through the lens of long-term fundamental changes that have affected the printing industry, among others, the transition to electronic prepress, emergence of production-level digital printing, and migration toward internet-based job ordering. It is well documented that fundamental changes in the industry as well as economic events (such as the aftermath of 9/11 or the Great Recession) served to create distance between leading companies and those who are treading water. The gap widened considerably with the outbreak of Covid-19, as many companies struggled to survive. For some printing companies, Covid-19 created opportunities to take market share from those who could no longer compete. Factors that made a difference include the specific vertical markets a printing company served, retention of talented employees, and the strength of its balance sheet going into the crisis. The strong became stronger, the weak became weaker.
As the impact of the PPP loan and Employee Retention Credit programs fades, the gap between winners and losers is likely to be revealed. It stands to reason that the paper shortage will impact the weaker players more, at exactly the time when these companies need to reestablish viability without the largess of Federal government giveaways. Once again, the gap has widened between leading companies and those treading water.
The paper shortage is particularly troublesome because it impacts an entire organization, including salespersons, customer service reps, plant management, procurement professionals, production staff and ownership. Pressure is being applied to printing companies on both sides of the print production supply chain; customers seeking to confirm orders on one side and paper vendors juggling demand that exceeds availability on the other.
|Paper Availability - Warning Signs Flashing Red Alert|
|1. Declining Profitable and Desirable Customer Orders Due to Lack of Paper|
|2. Deadlines are Missed Because Paper Order is Late or Canceled|
|3. Pressure on Profit Margins Due to Inability to Pass Along Paper Price Increases|
|4. Customers Switch to Electronic Media Channels Due to Declined Print Orders|
|5. Meeting Schedules with Multiple Makereadies but Customers Will Not Pay Extra|
Turn a Negative into a Positive
As we speak with companies across the US, we hear that even strong companies are being tested to navigate the maze of options and solutions to procure adequate paper to meet customer requirements and deadlines. Within the broader set of problems, there are also opportunities.
We know of one client in California who tweaked their inventory reporting system by adding a visual display to paper pallets in the warehouse. The signage, with the date of purchase and the cost of paper, matched the paper to specific customers for jobs scheduled months in advance, a cash-draining change for a company that was accustomed to real-time paper procurement. The new signage was a component of an awareness campaign to optimize working capital management in other areas to offset the cash now tied up in paper inventory. The result was improvements in press productivity, waste reduction, and in the front office, faster AR collection. In essence, the paper shortage became a rallying point for the troops who responded favorably.
Another client, a successful family-owned printing company in the Carolinas, noted that they successfully increased their internal manufacturing hourly rates in addition to obtaining an increase to cover paper costs. The general awareness of inflation, coupled with publicly announced paper price increases, created the opportunity to address the previously uncomfortable topic of price increases. As print customers learn that their print suppliers will gladly use their paper allocation to serve other customers, resistance to price increases has softened. Print buyers that go price shopping find that print suppliers cannot, or will not, allocate limited paper availability to bottom-fishing buyers. This has created the opportunity for across-the-board price increases, including internal rates attributed to labor and production costs.
|Paper Availability Affecting Business Viability - What to Do|
|1. Arrange for Rapid Financing from Family & Friends Supported by Private Lender Legal Structure|
|2. Form a Strategic Alliance & Outsource to Compatible, but Stronger, Business Partner|
|3. Implement a Lightning Quick Sale of Challenged Business to Preserve Remaining Value|
|4. Plan for Graceful Transition from Ownership Before a Sudden Shut Down is Unavoidable|
|5. Avoid the Expense & Reputational Harm of Bankruptcy & Plan for Orderly Wind-Down|
A client in the Midwest has augmented their M&A outreach program with offers of management, financial, and production outsourcing support to prospective acquisition targets that they know are struggling to obtain paper. This communications messaging is essentially the 2022 version of the time-tested strategy of enticing struggling target companies with much needed relief as inducement to respond to the buyer’s solicitation of interest in M&A.
Contact John Hyde, Esq. for a confidential discussion of any of these or other options (firstname.lastname@example.org; 646-220-4431).