Like Dust in the Wind
Ah, the life of a printer! There are so many variables around us that sometimes it seems like we’re that feather from Forrest Gump, subject to forces much stronger than we are.
I’m referring to massive forces such as disruptive technologies that change consumers’ habits by replacing paper with LCD screens, government gridlock that prevents postal reform from taking form or effect, new intermediaries that take advantage of our fragmented industry and its high fixed costs to extract surplus for themselves, and the always popular paper prices.
Each week, I seem to run into many of these issues head on. On Friday, I received an e-mail from the Dean of the Booth School informing students that going forward, course packs would be delivered electronically rather than in paper form. I can’t say it was a surprise, nor am I upset about saving $250 per quarter. I guess another one bites the dust. Kids these days take electronic notes, and storage and search of reference materials will be a lot easier with digital documents. In this case, what’s good for students, and good for the institution, and arguably good for the environment, clearly isn’t good for printers. Anyone care to make a value judgment on that?
In my Entrepreneurial Finance & Private Equity class on Saturday, we hopped into the time machine back to 2008 and analyzed the prospect of taking InnerWorkings private. We first determined the price we would have to pay based upon the comparables of the day. My classmates were having trouble figuring out why the 8.8X EBITDA price was only .51X the last 12 months of revenue, and why EBITDA margins were so low. I bit my lip and kept my mouth shut; I knew too much. It was a bit "Heart of Darkness," and I think I saw my own id. I’ll be happy to move onto a new project this week.
Sometimes, as the wheel in the sky keeps on turning, it spits out some good news, too. Like if you’re a farmer in India or China and you learn that Russia’s Uralkali is pulling out of the potash cartel and increasing output to normal levels. You know that the cost of a key fertilizer will be coming down, and you might be able to increase production or realize more margin.
Similarly, a story in The Wall Street Journal today explains how Brazilian pulp producers are planning $10 billion of investment in new capacity to bolster their position in the industry. Of course Brazil has cost advantages such as its fertile land and fast-growing eucalyptus trees that take only six years to harvest, but many pulp competitors must be shaking their heads right now. Brazilian firms are making a bet that China’s economy will, over time, convert from an export-based model to one predicated on middle-class consumption. They’re placing their bets in advance, and for us printers, we can thank them for helping to keep down a major input cost of paper over the next few years.
Each week, like that feather, we’re swept around by factors well beyond our control. While there are certain steps we can take to hedge our bets or mitigate our risks, we remain an industry susceptible to many threats from all sides. If things get too good or too bad, others can enter or we can exit. All the while, our industry is truly like a box of chocolates—you never know what you’re gonna get.