Flexible Packaging Leads the Way

With favorable trends in the use of plastics and pouches, flexible packaging converters are set for success.

FLEXIBLE PACKAGING CONTINUES to cast a shining glow over the package-printing landscape. The category has at least two very positive forces filling up its sails (could be spelled "sales"). One is the continuing industry trend toward the use of plastic materials and, along with this, the growth of pouches as a preferred packaging method.

In a study released last October titled "Paper versus Plastic in Packaging to 2008," The Freedonia Group projected plastic materials used in packaging to increase 3.1 percent annually through 2008. At this rate, plastic would continue to pick up share from paper and would account for nearly 50 percent of packaging demand (measured in pounds) by 2008. Its advantages include improvements that extend product shelf life, reduced materials usage, and various convenience features.

For pouches, growth projections are more dramatic. Freedonia forecasts U.S. demand for pouches to increase 7 percent annually through 2008 to $5.2 billion. This growth is being fueled by such value-added features as resealability, pour spout availability, and retort and aseptic capabilities. In addition, pouch-processing improvements have resulted in faster line speeds and reduced costs, which have opened up additional opportunities for pouches as a packaging option.

2004: A mixed bag (or pouch)

Generally, 2004 was a year on the upswing, but one in which package printers had to work real hard for everything they got. Bill Klein, executive director of the Packaging and Label Gravure Association (PLGA), said the bulk of his association's packaging and label printers estimated growth between 3 and 12 percent in dollar sales. Unit volumes were somewhat higher, reflecting a downward pressure on prices.

Marla Donahue, president of the Flexible Packaging Association (FPA), reports that sales of U.S. manufactured flexible packaging reached more than $21 billion in 2004, of which about 75 percent were printed. Preliminary data being compiled by FPA for 2004 is pointing toward revenue growth of close to 4 percent and volume growth in the range of 5 to 6 percent. "The difference between the revenue growth and the volume growth is related to increases in raw materials," says Donahue.

Last year was a particularly rough year for the pricing pressure cooker. This did not take anyone by surprise as the issue of material costs was listed as the top issue for both converters and suppliers in FPA's State of the Industry Report 2004.

The root of virtually all the pricing evil last year can be attributed to the significant and sustained increase in crude oil prices throughout 2004. These increases directly affected the costs of inks, films, paper, and energy. Coupled with the seemingly never-ending spiral of medical insurance and costs (which make college cost increases seem like deflation), package printers experienced cost increases on many fronts, while still being squeezed by the customer side of the supply chain to keep prices down.

Where are we heading?

Although the current economic and market conditions are not quite where one would like to see them at this stage of the business cycle, there is a sense of "strong industry optimism for the short and long term," says Donahue. The FPA is expecting annual growth between 5 and 6 percent for both sales revenue and volume. "Market conditions favor flexible packaging because innovation and technology enable it to respond to consumer desires for convenience and product safety," she notes.

Although The Freedonia Group predicts that plastic substrates will continue to improve market share at the expense of paper, it expects these gains to be at a slower pace than in previous years. This is due to the relative maturity of plastic in markets where it has an established presence. Other markets in which plastic is expected to make more rapid advances include pet food, fruit beverages, candy, and baked goods.

Pouches, of course, are the rising stars in the world of flexible packaging. Pouches are broken down into two main categories—flat and stand up. The Freedonia Group's study, "Pouches to 2008," calls for flat pouches to remain the dominant category through 2008, increasing 5 percent annually to $3.9 billion. Flat pouches will benefit from increased use in cheese, pudding and yogurt, and consumer products such as wipes. In addition, flat pouches with retort capabilities are expected to replace metal cans in the pet food and processed food markets due to benefits such as added convenience and fresher taste.

Stand-up pouches will find healthy growth opportunities in cheese, snack foods, processed foods, and lawn and garden consumables. These opportunities will help drive average annual growth of 15 percent to $1.3 billion in 2008, says Freedonia. Stand-up pouches benefit from their position as a relatively unique packaging form that allows brand managers to present a fresh look to their product lines.

Alexander Watson Associates (AWA) identified the food sector as an area where flexible pouches would have many opportunities to replace labeled containers. In its "Labeling Markets: North American Sourcebook 2004" study, AWA suggests that total demand for flexible pouches will grow at an annual rate of 7 percent through 2006, with food and beverage applications accounting for 78 percent of the total pouch market at that time. Included in this are stand-up pouches which AWA sees growing at annual rates of 15 to 17 percent through 2006.

Donahue echoes the positive outlook for stand-up pouches. She believes that stand-up pouches with spouts and trigger sprays will extend the use of flexible packaging into both health and beauty products and household cleaners. In addition, retort stand-up pouches and aseptic pouches will continue to make inroads in food packaging.

Challenges

The flexible packaging market faces some continuing challenges. The pressure on materials prices is likely to continue, with a resultant squeeze on margins.

In addition to the sustained high cost of crude oil, Corey Reardon, president and CEO of AWA, believes there is global instability in certain raw materials costs that is "likely to be a long-term problem due to a serious lack of capacity in some key raw materials."

This will be further compounded by the increasing supply-side demands driven by worldwide growth, especially coming from Asia. "The challenge for suppliers will be to keep up with their increasing market demands while continuing to meet the established needs of their home markets—which, our research shows, are likely to remain flat or at best show slow growth."

Another significant challenge facing package printers is offshore competition. "Imports continue to present a major challenge in terms of both foreign packaging materials, as well as completely foreign-produced and packaged products coming into the U.S.," says Donahue.

According to a recent FPA study, imports of flexible packaging products grew at a compound annual growth rate of 11 percent over the past four years and is estimated to have reached $2.2 billion in 2004. China accounts for about 30 percent of these imports.

"Over the last several years, China has competed in the commodity market, and it is currently investing in equipment to produce more sophisticated structures," reports Donahue. "Additionally, South Korean films and retort pouches are considered high quality by global standards."

The fact that offshore competitors are competing at a higher quality and sophistication is not a surprise to Klein. He believes this is a direct result of the investments emerging countries are making in the latest equipment and technologies.

"Offshore competitors' advantage is not so much in labor as it is in newer, more productive presses," he notes. "Developing countries are getting cutting-edge equipment and are getting 10 percent equipment and 90 percent process capability. Additionally, the developing countries have access to all the latest materials, as all the major suppliers have a global presence."

This observation is shared by Reardon. "New market economies are opening up around the world and they 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."

Strategies

Combating supply-side price increases, along with stiff competition from overseas suppliers is a daunting reality for package printers. To be successful, Reardon believes that printers need a low-cost mindset, while offering the highest level of service flexibility in the market.

"Printers need to take account of the opportunities outlined to give their companies broader market positioning by offering a larger portfolio of capabilities and services," he states. "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.

"The industry's value chain is complex and not very transparent. For converters to compete effectively in this end-user-driven market, there needs to be increasing dialogue throughout the value chain to optimize future opportunities. This is the message that emerges from all our researches in the industry."

It is clear that package printers need to be creative in how relationships are built with customers. Printers need to wrap competitively priced products in a host of services that make them not just a supplier, but an indispensable partner with their customers. To help make this happen, printers need to consider serious investment in the latest equipment and technologies.

Bemis is one company that is coming off a strong 2004 performance, and is using this as a springboard to invest in its future. In 2004, net sales increased 7.1 percent in its flexible packaging business over 2003.

Commenting on this performance, company President and CEO Jeff Curler said, "The market for our flexible packaging products is expanding. Our customers have a growing appetite for innovative film structures that perform well on their packaging lines,

and for graphics and convenience features that capture consumers' attention on store shelves. Our North American business is healthy and growing at a steady pace. This year we will be making substantial investments in new capacity to meet expected customer demand in 2006 and beyond."

Bemis has announced capital expenditures of between $185 and $200 million in 2005 to support its growth strategy. Curler explains the rationale for these expanded levels: "This is an exciting time to be working with global customers who are looking for innovative ways to capture the attention of consumers," said Curler. "With improving global economic conditions, new product initiatives, and competitive market environments, future growth at Bemis will be limited unless we expand our capacity in high-demand product areas. The capital investments that we make in 2005 will support our continued growth in 2006 and beyond."

Pliant Corporation has also announced new capital investments to support its strategic growth plans. It is investing $15 million to expand production capacity at three of its manufacturing sites serving the personal care and food products markets. These investments include two high-speed, wide-web, 10-color presses; a co-extrusion upgrade; and an electron beam polymer coating line.

Ken Swanson, president of Pliant Corp.'s Personal Care and Food Products businesses, said, "This investment is an important part of Pliant's overall growth strategy. Pliant plans to continue investing in technologies that strategically grow our positions with premier customers in these areas. This is the first phase of a multi-year investment plan to make personal care and food products cornerstone franchise businesses for Pliant."

Donahue has a bright outlook for the flexible packaging market. "Advances in printing technology, as well as innovations in film, are driving the growth of the industry. Flexible packaging is better able to respond to growing consumer expectations than other forms of packaging. Printing on flexible packaging is stunning. The industry is using spot varnishes, Opaltone technology, and NuDot technology to create vibrant packages. Digital photopolymer plates are being used, as well as reverse printing for high-quality flexographic printing.

"High-performance and high-barrier materials, resulting in packaging designed for specific product needs, are also driving growth. The industry is also developing 'traceable' film technology that will help combat counterfeiting and ensure greater product safety."

By Tom Polischuk

Editor-in-Chief