Carton Boxmakers Shifting Strategies

External and internal pressures are forcing changes in manufacturing habits, product mix and technology utilization.

By David Luttenberger

Controlling production costs, increased M&A activity, and meeting changing end-user demands are but three of the many issues folding carton converters must address in the coming year in order to ensure a future for themselves, and to maintain a healthy industry as a whole. Overall, 1997 was an on-again, off-again year for carton makers who, fortunately, ended on an up note that they hope will carry loud and clear through '98.

With folding carton demand and production so closely tied to consumer spending, particularly on non-durable goods, with the ebb and flow of the national economy, so goes the folding carton industry. As of November, the volume of folding carton shipments was down 1.6 percent vs. 1996, at $4.67 billion vs. $4.74 billion. According to the a National Paperbox Assoc. (NPA) survey, industry backlogs, however, were up slightly, 2.37 weeks vs. 2.26 weeks a year ago, but still down from an industry average of between six and eight weeks two years ago.

Regionally, only the South was showing positive growth at about 2.8 percent. Even with December actual numbers not yet recorded, forecasts are for an over industry decline in shipments of about 2 percent. Currently, the value of production for the North American folding carton market is about $6.8 billion.

A study released by the Cleveland-based market research firm, the Freedonia Group, projects shipments among this segment to rise 4.7 percent annually through Y2K to $9.6 billion—a figure most industry experts believe is highly unrealistic given end-user consolidation activity and competition in the form of alternative packaging structures continuing to erode this segment's share of market.

Sentiment among respondents to a business climate survey of NPA member boxmakers was that about half felt that business in '98 will be on par with '97. More than one-third—38 percent—indicated they see improvement on the horizon.

Production issues

As end-user needs change to reflect products marketed to shifting demographics and in such retail environments as club stores, so too must carton makers rethink their strategies in terms of production, market mix, and delivery methods.

First, carton converters must develop new raw-materials buying strategies in order to more efficiently cope with price fluctuations. Next, capital expenditures must justify a ROI that will serve existing markets, as well as new and emerging markets that will ensure a competitive position at least a full decade into the new millennium. Finally, manufacturers must established long-term, after-the-sale-service- and delivery-focused partnerships and contracts with end-users, who by and large, are seeking supplier/partners who can ship, if not produce, on-demand. This trend is forcing carton makers who cannot spin on a dime but must retain key accounts to increase inventory, a costly but increasingly necessary maneuver.

M&A activity

While the folding carton, as well as the rigid setup box segment, has and will continue to shrink, it will not be at a pace or value anywhere near what the flexible packaging industry has experienced in the past three years. Industry sources put the estimated total number of folding carton companies somewhere between 300 and 450, and the number of plants between 495 and 600.

Whatever the total, and despite pressures from end-user consolidation, alternative packaging forms and inter-segment competition from various box types, only a slight reduction in total plants or companies is expected in the next few years. However, such continued M&A activity could actually help the industry, as consolidation could occur to reduce or restructure debt or force the selloff of non-core SBUs. This could actually position carton converters stronger financially, make them less vulnerable to further hostile or necessary acquisition, and afford them greater investment assets to put toward new, emerging niche markets or for R&D.

Advantage: folding carton converters

If competition from flexible packaging isn't enough, folding carton converters may soon find corrugated converters knocking on their customers' doors as well, offering microflute constructions.

These recently introduced "small-flute" materials offer superior strength, light weight, and a "non-fluted" surface conducive to high-end graphics. What folding carton makers have in their favor, and what may be to their advantage, is that microflute materials can easily be run through their existing carton presses, whereas corrugated converters would most likely have to buy into the technology to run such thin gauge materials.

Another factor in favor of the carton maker is that an emerging class of quick-change "mid-web" converting platforms (26à to 32à) are being introduced specifically aimed at the folding carton converter. These presses have the capability to run a variety of thinner gauge board materials and can incorporate stations for "value-added" multiple-process converting. Along these same lines, flexo and UV/flexo for high-end folding cartons is developing at a pace that such markets as cosmetics/HBA and pharmaceuticals are no longer the sole domain of offset-based converting operations.