Challenges and Opportunities

The tag and label industry is facing issues with dynamically differing effects.

On one hand, the industry is brimming with opportunity. Radio Frequency Identification (RFID), security packaging, and shrink sleeves have grown and continue to grow in popularity, providing a burgeoning source of revenue across the industry.

At the opposite end of the spectrum, tag and label suppliers and converters are facing shrinking margins. Economic pressures from industry consolidation and higher costs in energy and raw materials have squeezed the industry on all sides.

Something has to give in the near future, and market predictions are leaning toward a positive result. Scott Pillsbury, president, Rose City Labels, already feels the optimism. “The conditions appear to be positive for most sectors—much better than in years past,” he said.

Growth under pressure

According to a study by The Freedonia Group, called “Labels,” U.S. label shipments are expected to increase 5.7 percent per year to $15.2 billion in 2008. RFID, two-dimensional bar coding, and plateless digital printing will open new labeling applications, propelling industry growth.

However, Corey Reardon, president and CEO, AWA Alexander Watson Associates, expects the industry to grow at a slower pace due to market pressures. “The business environment continues to be very challenging,” he said. “In North America, as in Western Europe, margin pressures are being experienced across the value chain, along with greater demands on service levels—such as smaller order volumes coupled with just-in-time delivery. Growth continues to be soft throughout the entire sector, at about 2-3 percent.”

The tag and label industry in other parts of the world will continue to experience much more expansion, adding more pressure to the well-established companies in North America and Europe. Reardon looks for the economic and market conditions to stay challenging for end users/brand owners and label converters as globalization proceeds.

“Worldwide, the Asia Pacific region is growing fast, and now commands 23 percent of the world’s total demand for labels—the third largest market for labels today, behind Europe (36.5 percent) and North America (29.9 percent),” he said. “While much of that consumption has been met until now by imported label substrates from America and Europe, an indigenous label substrate market is now developing in the region which is likely, long term, to threaten the traditional suppliers and further erode their growth levels.

“Developing markets across the globe—including South America and India, as well as Asia Pacific (and particularly China), and the emerging economies in Eastern Europe—represent an opportunity for North American and European material suppliers, but the low costs of labor also represent a threat to label converters as cross-border and even cross-continent trading increases,” he continued.

The threat from new world competitors goes beyond labor issues. With the tag and label industry already vying with growing demands for sachets, pouches, and other direct-printed packages, the real rivalry will come from fledgling supplier bases that produce these materials with newer technologies.

Reardon explained, “New market economies are opening up around the world [and] … are creating new supply bases for packaging, whether for cartons, other containers, or labels. Those new supply bases are, in many cases, working with newly-purchased state-of-the-art equipment and related consumables, and their output is of a quality comparable to that of the established markets in North America and Europe. Continents such as Asia—where technological know-how is strong—and the new consumer markets in Central and East Europe, particularly Russia, are now successfully exporting their narrow-web print offerings and are likely to compete on price in international markets. This is a serious threat for western producers, where margins are already under pressure and raw material prices are rising.”

Good news technology

RFID has caught the attention of the entire tag and label industry. In a recent study, called “Smart Labels,” The Freedonia Group predicts RFID labels to make up 85 percent of the total demand for smart labels by 2014. Currently, RFID labels are 10 percent of the smart labels demand, which includes electronic article surveillance (EAS), RFID, and interactive packaging labels. As the RFID market develops, the study projects the U.S. demand for smart labels to increase more than 11 percent annually to 8 billion units in 2009. By 2014, with the emergence of item-level tagging, the study predicts demand to grow to over 50 billion units.

RFID growth will—and is already—stimulating money-making opportunities across the industry. On the supplier side, the demand for RFID products is increasing. Converters want technology that meets industry standards and expectations, and helps them make an easy entrance into RFID label converting. The technology necessary to meet customer RFID label requirements is now commercially available and assorted, providing options in label construction and production. A flourishing customer base also exists and is only going to continue to grow.

“RFID has revitalized the self-adhesive label industry in 2005, with the promise of profits to come,” Reardon said. “In the long term, however, conductive inks may well be the way forward for printing the RFID circuitry—delivered by another major innovation, digital inkjet print stations in modular presses. Self-adhesive RFID tags may have a limited life in large-volume applications.”

Digital printing is another technology that is impacting the industry and will continue to do so, with time, on a larger scale. According to a market analysis by the Tarsus Group, entitled “Strategic Growth and Opportunity in the Label World,” digital color label printing has become “a mainstream label printing process with over 4.5 billion labels being printed digitally in 2005. Indeed, some 10 percent of all new label presses installed globally in 2005 were digital.” Tarsus predicts that digital presses could make up more than 20 percent of all new label press installations by 2010.

However, Pillsbury makes a good point. Both of these technologies are still developing and present a cost issue to most label converters. In addition, these technologies are mostly for niche label converters and serve some market segments better than others. All of this may limit the number of label converters who can and should invest and succeed with these technologies.

“These technologies will become pervasive in the coming years, but it is unclear how far they will impact the smaller players,” Pillsbury said. “No doubt that the large consumer product companies and national brand owners will embrace these technologies—they can’t afford not to. But, for the smaller converter, I am curious to see how partnerships will develop to allow all converters to provide these technologies to their customers.

“As the demands become greater, it will be even more important to specialize and concentrate on what you are good at. Being a generalist will be more difficult in the future,” he continued. “So, alliances between converters and suppliers will be more important than ever.”

Strategic outlook

A smart business strategy will be key for label converters to handle margin pressures and increasing global competition. Staying abreast of market trends and being able to react to them, thinking low-cost, and offering a high level of service flexibility are three main approaches to business that Reardon suggests for label converters.

In addition, he said, “Printers also need to take account of the opportunities outlined to give their companies broader market positioning, by offering a larger portfolio of capabilities and services. They also need to embrace globalization by linking up with other players in other countries/continents to create business alliances or even partnerships, to meet the needs of the global end users. In addition to consolidation across the value chain, a wave of collaboration should be expected. AWA publishes three Labeling Market Sourcebooks—on North America, Europe, and Asia—which are designed to give industry players a much broader grasp of the major markets in terms of both segmentation and geographies that are open to them.

“The end-user base continues to consolidate, and it has a strong requirement for a truly global supply base that can create the brand packaging image quality consistency that sells the products,” he said.

Developing relationships with customers is a specific strategy for success, Pillsbury said. “As always, we need to get closer to our customers and become an asset to their business. Just supplying printed products is not a safe strategy for the future,” he said.

“It will be more important than ever to be excellent at whatever you do. Being a ‘me-too’ player just won’t cut it. Staying on the leading edge, managing smart, and partnering with other leaders will be the keys to survival in the next five years,” he added.

Recap

With so many different challenges currently facing the tag and label industry, and more taxing issues expected in the future, the industry’s situation seems difficult. The key to looking beyond the troubles is embracing the opportunities presented by the growing segments.

Reardon said, “In the medium term, there are both threats and opportunities. The current difficult business environment means that label and tag printers must be very diligent to maintain an acceptable bottom line result—and that means that, today, they really need to have a low-cost mindset. The narrow-web press manufacturers, substrate suppliers, and consumables manufacturers, however, have delivered a broad base of new opportunities for growing the narrow-web print business—from printing non-self-adhesive webs to adding value to product decoration through innovative label finishes (tactile/heat-resistant, e.g.) and innovative print solutions (thermochromic inks/holographic ink, etc.). There are, therefore, many ways in which a narrow-web printer can broaden its portfolio.” n