Posted August 30, 2012 Twitter: @PaperlinXsuX
suX was recently advised by reliable sources (plural) that PPX UK looks like taking a really big hit at Aldersons, certainly north of GBP 1 million.
Someone deserves to be fired over this.
HERE suX outlines a new, possibly revolutionary, approach to UK paper merchanting which would solve the bad debt problem for PaperlinX. It's based upon seven thoughts:
- Credit insurance is an unnecessary cost because its an abrogation of responsibility for one of the key functions of every business - getting paid. It's akin to investment schemes that rely on tax benefits rather than cash flow;
- It's in everyone's interests to have stable profitable paper merchanting, especially the mills;
- Paper merchants are their own worst enemies as they hold only one market advantage, exclusive supply rights granted by the paper mills;
- Radical change can only be initiated by a market leader. All commodity markets confirm this;
- Most commodities are sold on an unbundled cost basis. The only reason why China buys more iron ore from Western Australia than Brazil is because the former is closer to China. Paper is a commodity. Printing is rapidly becoming commoditized;
- Private financial analysis undertaken on behalf of OZ PXUPA investors showing what happened to PaperlinX's profits when management lost control over its receivables and stock; and
- Most of the problems at PaperlinX aren't those trotted out by senior management but what lies between their ears.
PrintWeek UK is now full of Aldersons; which is why suX now feels comfortable raising this matter. One kind supporter set this extract from PrintWeek:
“Here we are the day after the bank holiday, and 800+comments on Aldersons problems, to the economist-market analyst, Paperlinxs are in as a major creditor, according to inside info, the value of total paper debt is possible 25% of the turnover quoted !! certainly lets hope for all suppliers they at least get 80% back fom there insurers, the sad part is they to supply were beaten down by the printer to a gross margin circa 2-3% is it worth it??? as the risk is always there,.
Paper merchants need to get back to decent margins and Printers must not take work on below cost. it aint worth it”
Back to basics
suX holds old fashioned views about business. If you cannot make an acceptable return on equity, either:
- find a way, not a wish; or
- exit the business.
PaperlinX allegedly holds circa 50% of the UK paper market and still gets screwed around on deals like Aldersons. It's very poor management in the UK that permits this to occur.
There are few defined cost areas in paper merchanting:
Back to credit and bad debts - an idea!
Hypothetically, just imagine that if from tomorrow PPX had a net cash price ex store for a commonly used product of $1,000 per whatever unit of measurement is applicable.
This is the price at which PaperlinX can happily sell paper all day long and never have a bad debt, can sell off Delivery Co and negotiate better trading terms with its suppliers because it has massive free cash flow. It is a highly competitive "raw" or unbundled price.
NOT POSSIBLE? Well actually it is. The supermarkets do it worldwide. Has anyone bought groceries on credit or had free home delivery recently? They screw their suppliers for 90 day terms, or massive discounts for 7 days. They even get free cash flow from VAT/GST collections made today and remitted on average, in OZ at least, 35 days later.
The hypothetical $1,000 per unit net cash price ex store.
Credit beyond a token amount, say $5,000, is granted only if secured by a debenture charge over a company, or like security for other business structures, and guarantees from all related entities and shareholders and directors.
Interest is charged on a daily basis on all credit from date of supply to receipt of cleared funds. This is the banking side of paper merchanting redefined. Suggested cost 20% pa on a daily basis.
Delivery costs are fixed, published and reviewed half yearly. Something like the postal parcel service. Non-negotiable.
What is apparent is that if every buyer of paper found these terms repugnant, which is their right, who will supply them? EBB may pick up some as will Premier and Antalis. But their resources are finite and all the while this tantalising $1,000 per unit net cash price ex store is available at PaperlinX.
Implementation - voluntary led by PPX. It needs to be implemented abruptly. To do so otherwise would allow the other merchants to slowly increase their capabilities. Would it send some printers broke? Maybe, but they're the same ones who'll go broke eventually and leave suppliers with bad debts.
Implementation - forced upon the paper merchants.What if credit insurance become prohibitively expensive? Unlike equity investors, credit insurers aren't fools. The industry may effectively withdraw from insuring printers overnight. Tim Elliott would have the last laugh.
High Risk? Not compared with the "me too" approach which has cost the owners of PaperlinX circa $2 Bn in market cap in 8-9 years.
It's noted that recently in Australia the sales are down due to credit concerns. This is applauded.
Too harsh? "Most of the problems at PaperlinX aren't those trotted out by senior management but what lies between their ears."