In This Corner. . .

The flexible packaging industry is, and will continue to be, a relatively healthy segment in the realm of package printing. This doesn’t mean that everything is rosy—not by a long shot. The U.S. economy is being stressed to a significant degree by a credit crunch driven by the sub-prime fiasco, and inflationary pressures fueled by the cost of crude oil, which recently surpassed $110 per barrel.

Flexible packaging advantages

A slowdown in the economic environment not withstanding, flexible packaging has many factors in its favor. It continues to move into established packaging segments with distinctive product offerings, many times in the form of pouches. Although it’s losing some of its uniqueness, the pouch category continues to make inroads against other packaging segments.

In many cases, the recent focus on sustainability and the run-up in prices favor flexible packaging. From a sustainability standpoint, the amount of packaging material for a particular product can be significantly less, which also impacts the cost equation. Ehud Safrai, president of flexible packaging supplier CLP Packaging Solutions, notes that a pouch can provide the same volume capacity as a rigid plastic container, while requiring as little as 40 percent of the plastic material required to create the rigid container.

This can translate to a significant positive impact on both costs and sustainability when it comes to transportation. One truckload of empty one-quart pouches can replace nine truckloads of one-quart bottles, says Safrai, reducing transportation costs and overall carbon footprint. “It’s transportation that really challenges rigid packaging,” he says.

Then and now

The year that just passed could go down as a transition year from an economic standpoint. Many of the factors that are currently stressing our economy had their roots in or accelerated noticeably during 2007. These would include the housing industry slowdown, the sub-prime problem, oil price increases, and recessionary factors.

The price increases had a particularly challenging effect on companies throughout the entire supply chain. “We had big increases in our materials and transportation costs, but customers were putting pressure [on us] in an effort to keep our prices down,” states Safrai. “Now, I think the reality of the new market, the reality of $100-a-barrel oil, is setting in and customers are accepting prices that reflect the changes in our costs.”

Safrai still has an optimistic view of the flexible packaging industry. This could be influenced by CLP’s strong niche in pouch production, a continuing growth segment in packaging. “We are enjoying great growth in the flexible packaging industry and we expect it will continue for years,” says Safrai.

At the recent Flexible Packaging Association (FPA) annual meeting, George Thibeault, president of Constantia Hueck Foils LLC and chairman of FPA, presented an update on the association’s State of the Industry Report. He noted the industry’s 4 percent compound annual growth rate (CAGR) in the U.S. during the last decade. The industry also achieved productivity gains, reflected in the benchmark of $310,000-$320,000 in sales per industry employee in 2007, a figure that was about $250,000 just a couple years ago.

In the short term, the FPA projects a growth rate less than what was achieved during the last decade. It estimates that 2007 grew around 2.9 percent, down considerably from the 5.1 percent growth achieved in 2006. For 2008, the projection is 2.1 percent. Further, based on FPA surveys, profits were flat in 2007 and could be down in 2008.

More consolidation?

The flexible packaging industry has experienced its fair share of consolidation during the last several years. In a presentation at the FPA’s annual meeting, Doug Lawson, managing director for BMO Capital Market’s Packaging Group, reported that 2007 was a record year for mergers and acquisitions (M&A) in the worldwide packaging sector, with 386 announced transactions. Of these, 100 were in flexible packaging, 28 of which were in the U.S. Strong economies, strong earnings, and good capital markets drove the high level of M&A activity.

Heading into 2008, however, the environment had changed appreciably. The overall economy is experiencing a slowdown and there is substantial tightening in the credit markets, which Lawson said began in the summer of 2007. These factors will slow the number of M&A transactions in the short term and will also result in lower valuations.

Out in time, however, Lawson believes there are still compelling reasons for further M&A because there is still much fragmentation in flexible packaging. According to data from BMO Capital, the top ten flexible packaging companies account for about 65 percent of the North American market, while more than 90 percent of the companies have revenues of less than $100 million. Lawson says that other factors driving future M&A activity include geographic expansion and economies of scale.

Dr. William Llewellyn, VP/senior consultant for AWA Alexander Watson Associates BV, concurs with this assessment. He believes a recession is already in place in the U.S. and UK. This slowdown, along with a “credit crunch,” will reduce the availability of funds for expansion, acquisition, or capital investment. However, he also believes the opportunities for M&A will remain strong because of the high fragmentation.

Trends that will help

There are several trends worth noting that will continue to provide growth opportunities in flexible packaging. ­Michael Richmond, cofounder of Packaging and Technology ­Integrated Solutions LLC, in a presentation at the FPA annual meeting, listed several areas of interest: taste/performance, customer convenience, safety/security, and sustainability.

There are a number of demographic and lifestyle issues that are driving customer convenience attributes in packaging designs. Consumers are looking for more microwaveable and cook-in packaging, notes Richmond, along with hand-held, single-serve, and on-the-go products. He adds that the aging population will require more emphasis on easy-open/reclose features because of dexterity issues.

Safrai believes flexible packaging is in a favorable position to take advantage of opportunities such as these. “The growing trends toward single-serve portions in food and beverage, portability of food, and concerns about food safety all favor flexible packaging,” he says. “Consumer convenience—microwaveability, frozen foods, and ambient storage—also offer excellent opportunities for flexible packaging.”

Food safety has come to the forefront because of several significant, highly publicized food contamination issues and recalls. Brand owners (food or otherwise) are well aware of the damage that even one incident can cause to a brand whose equity can take years to establish in the hearts of consumers.

Richmond notes that product safety and security go well beyond simple tamper-evident packaging. High-technology solutions such as active packaging and RFID for better tracking will play a role in product safety in the coming years.

Llewellyn believes that material developments in the coming years will focus on addressing a number of ­issues, including food safety and sustainability concerns. “There will be further developments in order to extend the barrier properties of films mostly in multilayered constructions,” he says. In addition, high-technology advancements will play a role in ­material developments for anti-bacterial and ­intelligent packaging solutions.

Sustainability is here to stay, says Richmond, “It’s not a fad; it’s not going away.” Corporate accountability has evolved to now include the “triple bottom line”—economic, environmental, and social. Richmond believes brand owners are serious about sustainability and legislation is imminent.

Again, Safrai sees this as a plus. “I think the interest in sustainability will help the flexible packaging market in several ways. Most directly, it opens up a tremendous opportunity for refill pouches, especially for household products,” he says.

Making a difference

“Packaging is a key enabler for new products and is making more of a difference than ever before,” says Richmond. Flexible packaging will be in the thick of many new product efforts and will remain a dynamic market segment where technical developments and innovation will be rewarded on a worldwide stage. pP