We came into 2022 with a nice, continued drive of business and a promising forecast of continued strength. This was indicated by my forward leading economic indicator: our busy Design Department. We are extremely delighted to see great opportunities as retail is opening up, coming off a very strong fall season. All of this will help us drive success, with our continued push towards building retail display campaign programs. Understanding our position in the retail development space, we are continuing to see some disturbing realities in our supply chain and with inflation. Adding in the lack of labor in the US and we are in for more rockiness with a choppy and a very expensive supply of goods. Many believe 2022 will cool, regarding supply chain issues, and expect a slowdown in inflation. We are seeing the complete opposite. There are a few things we have going for us in the US economy as the consumer still has plenty of pent-up demand and a very strong personal balance sheet. The consumer will continue to buy stuff. We are going to need these fundamentals, as we must deal with inflation. I am not sure if the Fed will do enough to cool the economy.
Here are some issues we see as they affect our business. First, our BC Logistics folks reported out that freight costs are still ramping higher, and the supply of drivers continues to dwindle. Let’s look at these statistics. Loads per driver in the third week of December was 6 loads for every driver. We would expect that cooling trend to continue into this year. However, in the third week of January loads per driver are up to 12 loads per each driver. Here is a look at costs per mile:
Oct $2.85
Nov $2.92
Dec $2.99
Jan $3.13
We are just now beginning to see the weather effects around the country snarl transportation, which will continue to drive costs up. This is not going to get any better as costs are skyrocketing for everything. Even in the world of box IP, the largest producer of linerboard (the stuff needed to make boxes), announced an increase of $70.00 a ton. This can result in a 10% increase in the cost of a box.
Most of these increases in transportation, and just about everything else including boxes, is driven by three things. First, there are not enough people to fill the job openings we have. Secondly, we pumped up the money supply by more than 5 trillion dollars in the last year. We are looking for more reckless spending out of Washington which so far has proven to drive inflation out of control. Speaking of Washington, the third factor that will not go away is that our President declared war on oil during his first day in office. This is completely critical to driving inflation higher and higher. As I write this piece, the price of a barrel of oil is over $90 and a gallon of gas is up a dollar from just a year ago. Get ready as that baby is going to shoot the moon. In the Peoples Republic of California, we are paying over $5 a gallon of premium. Soon that will be $5.50, and within a few months we will be paying six bucks a gallon. There is no solve for this at all whatsoever, as the policies of the Oval Office are driving this ramp up in oil. In our zest to transfer from oil to renewable energy, we chopped off the supply oil way too fast. The oil patch folks obviously have no interest in continuing investment into the oil production process due to this war on oil from Washington. As such they are going to milk existing wells and drive major profits to their bottom line. This is supply (cut off by policies) and demand created by a robust economy coming out of a pandemic. So, oil, which is responsible for the creation of everything, will continue to spike. Today, we are reliant on energy in our industrialized nation. Our energy source is oil. Bryon King puts it this way: “energy is something like 7% of our gross domestic product but try running the other 93% of the economy without it. In other words when a country-certainly its government screws up energy, it screws up everything.” He continues on to say,” food is energy, modern food is the product of tractor and truck fuel, fertilizer, herbicides, processing, packaging and lots more transportation. Rising energy prices will feed into inflation.” So, there you have it. Our policies out of Washington are squarely to blame for much of our inflation. This will not be fixed for years as there is no way these policies will change unfortunately due to politics.
What are we doing at Bay Cities to help fight this drive towards higher prices? We have the same issues: higher labor costs, higher paper costs, higher energy costs, higher transportation costs and well just about higher everything costs. First, it starts with design and performance testing everything that is packaged. Our installation of new ISTA equipment will certainly lend a hand in that process. We learned through supply shortages. When heavy linerboard was nowhere to be found, we looked at downgrading into lighter high-performance substrates. We can continue down that road and help drive cost out. We are installing a very large diecutter, that will help us make products that once needed two pieces made in one piece to reduce the assembly cost in addition to the inventory and handling cost of one instead of two pieces. We also look at utilizing our digital strengths to reduce setups and run smaller quantities, so we don’t fill up warehouses with extra inventory. I think, it is time to look at reducing carrying inventories, as we will be shifting from a “stuff” economy towards a service economy. Somewhere in this year we will slow up buying “stuff” and participate in going out and using services. We were once a service economy, remember?
There will be folks in our population that will not come out and participate in the Covid clear world. Face it, Omicron is done, the flu like virus is over and it is time we treat this virus like a flu. That is of course if some wild, super deadly, variant doesn’t come out and mess with the world again. Europe is completely relaxing its mandates, as this pesky virus has taken enough out of economies, and it’s time to move on.
We are beefing up our cybersecurity effort. We are training all our employees with KnowBe4 programs to reduce in insurgence of evil cyber plots up front. Bay Cities is investing into AI to help move things through our systems better and faster. We are continuing to train, coach and breath the Customer centric culture throughout the whole enterprise. Lastly, we are focusing on our Wellness program to build a healthier workforce and a more stable one.
To sum it up: inflation is here to stay. Most of which is caused by poor policies coming out of Washington. We will be shifting towards a more service-oriented economy as we move from buying stuff to buying services. Online purchases will not retreat, and retail is opening up with a vengeance. Supply chains will be messed up throughout the year. Look to begin to wean down carrying inventory towards the end of the year, as the shift will take place from stuff to service. Soon after, supply chains will get better, and quicker lead-times will come back to some degree. Trying sooner to reduce more expensive money in warehouses will prove very helpful. We think digital printing is a great solution here as without change over costs related to labor and tooling, we can help reduce and eliminate obsolescence in inventory and breath speed to market for our Clients. Once again, I believe inventory is the devil. This where we hide our waste and mistakes. With cost of cash going up due to interest rate hikes, inventory will get more expensive. Prepare now for leaner inventories later. Our continued investments will help our Clients in these areas. I can’t stress enough, utilizing more of our digital strengths for inventory obsolescence and speed to market is a great opportunity for our Clients to fight inflation. Even with all of this uncertainty, rising inflation, labor shortages and crazy transportation costs, this will be a very productive and prosperous year, provided we keep our eyes on the horizon and make great decisions.
Greg Tucker
Chairman/CEO
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