Ahead of the Curve

Carton converters should use their economic head start to get a handle on sometimes-elusive niche opportunities.

by Susan Friedman, Editor

Folding carton converters, as well as other primary packaging producers, typically have the unique, though sometimes stomach-wrenching, opportunity to see and experience what will happen to the general economy before it takes hold at large.

According to Jerry Van de Water, president of the Paperboard Packaging Council, the U.S. folding carton industry is generally regarded as a harbinger of economic cycles because cartons are produced and entered into the supply stream months in advance of consumer goods production. What carton converters see now, he notes, is a fair predictor of where the economy will be in six to nine months. Has this segment, then, already weathered the big-picture worries currently dominating the headlines?

"No. 1 on the hit parade is the potential for recession," says Van de Water. "Though leading economists say we will avert it," he notes, "it's going to be a close call. If we do get by it's going to be by the skin of our chin." Though 2000's fourth quarter downturn was interrupted by an uptick in carton production in January 2001, carton market conditions are expected to continue to be spotty for some time. "For some converters, business has never been better," he points out.

Proof of recent profit-making comes from the Pacific Coast Paperbox Manufacturers Association, which represents folding and rigid paperbox manufacturers west of the Rocky Mountains from British Columbia to Baja, Mexico. Executive Director Edwin Mozley reports members' collective sales volume during the period January to November 2000 increased 10.51 percent over the same period in 1999.

And there should soon be more good business to go around. Van de Water believes once interest rates come down and tax relief is acted upon, converters should be able to generate working capital that could help build a roadway out of the current slowdown.

"Converters who have done a good job of keeping themselves unleveraged will weather the current economy better," advises Ben Markens, president of consulting firm Converter's Resource. In addition, carton converters will need to get more savvy at securing previously contracted business.

"Lots of carton business is tied up in contracts that may not come up for review for 24 months," Markens elaborates. "It can be tough to get in the queue to compete for this business." He adds the increased cost of paperboard production (primarily due to higher energy rates) may be particularly hard to recoup for converters already locked into a customer contract.

Full plate of issues for executives

The consolidation initiatives that characterized the carton market in 1999 and 2000 have slowed down a bit in the past six months, observes Liz Hill, director of industry information at the Paperboard Packaging Council. Hill maintains large converters will likely continue to purchase smaller firms to achieve niche footholds. Alliances will also be pursued in order to achieve greater global presence.

"Capacity has to come out of the industry somehow," says Markens, "so consolidation will continue for large and small players." The collective aging of carton company owners leads him to expect many age-50-and-older executives will cash out, particularly if no next-of-kin are in position to take over the business. "Over the last year, the carton industry lost a lot of old-line companies, such as F.N. Burt, and this year it may lose a few more," he adds.

But to what degree have recent consolidations actually paid dividends to the carton companies involved? "In mature markets," explains Van de Water, "there is less ability to capture profits with price. As a result, carton firms must focus on establishing cost-reduction measures to ensure a merger benefits the bottom line. A consolidation's challenge lies primarily in working through the transitional time frame, which can be lengthy. Extensive planning and review is typically necessary, coupled with managing sometimes thorny issues of integrating databases and rationalizing productive capacity, all while maintaining critically important customer focus, which in itself requires a continual review of internal processes," he comments.

Consolidations force carton industry executives to contend with many conflicting forces—but these aren't typically the only issues on their dockets. For industry executives at smaller converting operations, availability of talent is at the top of the list, says Van de Water. With employment at such low levels, employees for hire in the labor pool may lack the necessary work ethic or skill to effectively perform their duties.

For larger firms, he believes the latest fad in purchasing is the dominant concern. The recent reliance on auctions by packaged goods companies has reduced the basis for purchase decisions to price, and converters hope their customers are beginning to see the limitations of this approach.

Equipment, materials, and markets

Capacity reduction and plant closures may cause converters to rethink, or even defer, equipment purchases, but Van de Water says upgrades are a must if converters want to capitalize on offset's major advances over the past five years, such as increased throughput via faster makereadies and run speeds, and computer-to-plate technologies.

Converters pursuing a complete digital workflow, however, may have to be prepared for some bumps in the road to return on investment, contends Markens. "Any digital technology makes sense if it drives costs down, but it's tough if a converter has to spend time and money to debug a new investment."

The route to a profitable new market niche may also be a little unclear. When asked to identify the hottest end-use markets for the carton segment, respondents to packagePRINTING's 2001 Folding Carton Converters Survey did not indicate a single strong contender. Rather, 24 percent cast support for specialty foods; 24 percent gave the nod to CD/computer games; and 21 percent rallied around nutraceuticals. In 2000's pP survey, converters gave CD/computer games' growth potential a commanding lead over other markets.

Expert opinions suggest carton converters should avoid putting off strategic choices or continuing to muddle through on middle ground in the coming year. Making the right choices, however, could require tracking moving targets.

"With competitors aligning, processes converging, and markets combining, it will be increasingly difficult for converters to differentiate themselves," Van de Water states. "Those who try to be all things to all people will be stuck in no man's land."

Converters with clearly defined niches, such as high-quality printing, or end-use markets such as food, beverages, or tobacco, are the ones who are doing well, agrees Markens. Those who focus on owning a niche may fare better at keeping profits up than those who focus on owning a brand name. "If everyone recognizes the name of your largest customer, you could be in trouble," he contends.

Prospects are also better for converters focused on cost-reduction, perhaps through the use of flexo printing, or through supply chain management strategies that reduce inventory, Markens suggests.

The key to profits may lie in branching out without spreading operations too thin. Van de Water believes executives must add a service orientation to the industry's product emphasis, and take a hard look at supply chain services positioning. The progressive carton converter must move beyond the traditional focus on the pressroom, look upstream and forge an understanding of both digital workflows and asset management.

For more information...

Converter's Resource Inc., Westfield, MA, (413) 562-8405, www.convertersresource.com.

Workshops, training, consulting, mergers.

Pacific Coast Paperbox Manufacturers Association (323) 581-1183

Paperboard Packaging Council (703) 836-3300