Cartonmakers Must Accentuate Positives

The carton industry posted modest gains in 1999, but could renewed strategic smarts bring major momentum in 2000?

By Susan Friedman

At first glance, the folding carton's economic health could be summed up as simply "all good." According to Liz Hill, director of industry information at the Paperboard Packaging Council, "the national economy is still in an upswing, and the folding carton economy is following."

Hill's rundown of folding carton gains in 1999 includes a .7 percent rise in annual sales, and a 2.3 percent increase in tonnage. She also reports a .5 percent export volume increase, as carton companies pooled their strengths through both domestic consolidations and alliances with European and South American countries to serve the needs of this market. Hill says reinvestments in equipment, the growth of flexo printing, and improved management and financial responsibility forced by customers' strategic sourcing are part of the basis for these satisfactory returns.

Boxboard Containers International continues the feel-good economic feedback by calling 1999 "the second consecutive year of marked growth [for folding cartons] following a disappointing sales performance in 1997." BCI's list of positives includes product shipments increases—1.14 percent in terms of volume, and 1 percent in terms of dollar value—as well as manageable changes in raw material grade prices— less than 5 percent in the past three years.

But there are some experts who diminish the upbeat tone of these statistics with the following question: Could the folding carton industry be doing better? "Perhaps the more interesting story is why there has been so little annual growth [for folding cartons] during one of the longest [national] economic booms," states Mike McGuinness, president of consulting firm PacSys Packaging Systems Solutions. McGuinness points out the carton industry's 1.5 percent to 2 percent annual growth rate in the past few years isn't that impressive in light of national strengths such as real GDP growth, increased real disposable income, and bolstered purchases of non-durable goods.

McGuinness credits cartons' economic lag to continuing overcapacity and resulting price wars, which have mired profit margins in a level substantially below those of other industries. Further hampering cartons' progress, he says, is the perpetuating tendency of U.S. suppliers to use technically dated, fully depreciated equipment. (European plants have an average equipment age of 7 years compared to 13 years in U.S. plants.) Low profit margins from old equipment ultimately lead to an inability to generate capital for new technology that would improve efficiencies and margins.

McGuinness also implies higher growth rates could come from more focused expansions on the part of larger, vertically integrated firms who both consume and supply their own paperboard. "Is their business strategy driven more by selling board or making cartons?" he asks.

One hint of the emergence of a more singular focus may be inherent in the strategy of ACX, parent company of Graphic Packaging. ACX became the largest folding carton company in North America last year with the acquisitions of Universal Packaging, and Fort James' folding carton operation, yet remains non-integrated, McGuinness points out. He believes this could indicate a reversal of the long-established trend by vertically integrated companies to acquire other folding carton companies.

Focus was evident in the sure-handed, big-picture thinking behind this past year's heavy consolidation traffic. In Packaging Strategies' Packaging Outlook 2000 Report, Karen S. Kaplan, senior consultant for Jaakko Poyry Consulting NA, confirms 1999's folding carton consolidations were largely strategic. Transaction objectives included divesture of non-core businesses, acquisition to create leading marketshare levels, and acquistion to gain end-use specialization.

By contrast, Kaplan reports '99 consolidations in the containerboard sector sought to balance supply and demand, and ultimately lend pricing support and bring back profitability. Major deals in the containerboard sector led to capacity withdrawals of almost 2 million short tons, or 5 percent of total North American capacity—a success which led to a pricing recovery that is expected to continue if export shipments stay strong.

Should folding carton converters follow containerboard's lead and turn their attention to nickel-and-dime-oriented aspects of consolidation? McGuinness says yes. "Folding carton consolidations will only benefit the industry if older plants and older equipment are shut down and retired," he says. "Sometimes these older assets are inflated to leverage the debt required to purchase a company, making them difficult to write off later on."

Threats and best bets

Mirroring the business focus that dominated consolidations, cartonmakers' most-often cited concerns for 2000 center on big-picture economic and strategic issues. packagePRINTING's Folding Carton Converters Survey revealed converters to be most consumed with maintaining profit margins (69%), controlling operating costs (55%), and finding new markets (53%). When asked to zero in on new markets, converters cast the strongest vote (31%) for CD/computer games' potential in 2000, followed by nutraceuticals (11%), and specialty foods (11%).

It may behoove cartonmakers to balance their efforts to branch out with measures to protect the status quo. Kaplan strongly recommends keeping a keen eye on the stand-up pouch's steady inroads. Not only are pouch filling line speeds now competitive with cartoners, she points out, but applications are taking hold in the cake mix, frozen food, and snack markets. Kaplan ultimately believes the stand-up pouch could be a bigger growth threat to cartons in 2000 than coated unbleached kraft was to the segment in the 1990s.

More operations-oriented concerns, though cited as important by a high percentage, came up as less pressing to the industry overall; these included finding/retaining skilled labor (47%), keeping pace with new technology (36%), and justifying capital equipment purchases (22%).

One new technology carton converters should not be overly concerned with, according to the Pulp & Paper study recently released by the Freedonia Group, is the Internet. The study claims that while electronic commerce will limit gains in certain types of business forms and other papers, paperboard packaging will benefit from increasing shipments of goods.

What's more, the study projects overall paperboard demand growth of 2.5 percent per year through 2003, to more than 51 million tons. Recycled paperboard will continue to replace competitive grades, although at a slower rate than during the 1993-1998 period, capturing roughly 38 percent of total U.S. board demand by 2003. Demand for all other paperboard grade will lag the industry average.

Offset carton printers may see flexo as less of a threat in the coming year, as print process choices continue to evolve. McGuinness points out familiar trends remain firmly in place, with offset remaining lead dog, gravure contining to lose ground to both offset and flexo, and flexo's market share gains stealing the spotlight. The wild card entry that could shake up these dynamics, he says, is new generation sheet-fed offset technology's significantly faster speeds and reduced makeready. These upgrades, combined with sheet-fed's wide-sheet number-up advantage, have slowed flexo's share of market penetration. For its momentum to kick back in, McGuinness says flexo must snag a greater share of wider web-width installations and produce sheet-fed offset print register consistently.