Challenges Facing Folding Carton Printers

The sluggish recovery of the U.S. economy continues to plague producers of consumer packaged goods (CPGs), and folding carton producers have felt the sting from the recession as well. However, a consensus among carton-makers indicates that as uncertainty in our economic future dissipates, consumer confidence will grow, and the recovery will become steadier. PPC members report growth of more than 4 percent in the first half of 2012, a marked turnaround from the 7 percent drop in 2008-2009, and the 4 percent decrease in 2010-2011.

Sustainability on the rise

The packaging industry, including folding carton manufacturers, faces additional challenges as we recognize the need to live a more sustainable lifestyle. Paperboard is ideally positioned to take advantage of this trend, since for more than 130 years it has been a renewable, recyclable resource.

According to James Gordon, president and CEO of Winston Packaging in Winston Salem, N.C., many of its customers are looking to move toward more sustainable packaging. "With paperboard being a renewable resource, we believe it's a great time to promote the use of folding cartons instead of plastic."

Virgin grades of paperboard are made from a renewable resource—trees. Unlike some competing materials that deplete their resource every year, the industry plants more than three times as many trees than it harvests. By increasing the world's forests we are also helping the planet to scrub itself clean of carbon. The challenge for the folding carton industry is to emphasize to consumers that trees are a renewable crop, like corn or potatoes.

Along with the use of renewable virgin stock, Joel Zaas, president of BOXit Corp. in Cleveland, Ohio, also sees a growing request from clients for the use of recycled board.

In addition to paperboard's solid sustainability record, folding carton converters are seeing the benefit of a growing marketing trend: QR codes. These are small bar codes that can be scanned and interpreted by smart phones, connecting the user to promotional collateral such as coupons, Web sites, social media sites, or consumer reviews. This technology has created an impressive value proposition for packaging customers and CPG consumers alike.

Growing challenges

Folding carton companies share the challenges and uncertainty that all U.S. businesses face. To offset increasing healthcare costs and an expected increase in federal taxes, Kyle Eldred, president of Frankston Packaging in Southlake, Texas, found a way to increase competitiveness in one division by on-shoring—finding a U.S.-based firm with a more competitive cost structure. "Everybody wins," he says, "because we still serve our customer at a profit and another U.S. company has increased volume and profitability."

Zaas employs a successful "one-stop shop" strategy. By offering customers the ability to source both rigid boxes and folding cartons from his company, he feels he has found a competitive advantage. He adds, "Lead times become shorter and shorter every year and we continue to try to be flexible, which makes it easy to do business with us."

According to Zaas, some companies have difficulty hiring qualified full-time employees, which can result in the use of more temporary labor. He says that his company is fortunate. "We are pleased that a substantial majority of our employees have over ten years of experience and are dedicated to producing quality boxes on-time, even when I ask them to do the impossible," he states.

In the beverage industry, according to the 2012 PPC Trends Report, plastic bottles and flexible packaging are continuing to take market share from paperboard. Even paper-based aseptic milk containers, which account for 70 percent of the world's milk packaging, are seeing increased competition from plastic PET containers and stand-up flexible pouches.

Nevertheless, RISI, the internationally recognized research firm, forecasts beverages among the highest growth folding carton end-use categories during the next five years. Some of the challenge is being met by innovation. For example, the world's first pulp-molded wine bottle is being introduced in the U.K. at the end of the year. Developed by GreenBottle, it weighs about 60 g, compared with 400+ g for its glass equivalent, and can be recycled with newspapers or even composted.

At Winston Packaging, Gordon notes the burden of increasing costs of raw materials, which customers are reluctant to accept as pass-throughs. To help manage these costs, Gordon decided to invest in new technology throughout his operation from prepress to printing, as well as in cutting and finishing. Improved technology with faster makereadies and run speeds help offset higher input costs. As a result, he says, "We will be well-positioned to grow our business and supply competitively priced products to our customers."

Paperboard Packaging Council (PPC) president, Ben Markens, notes that at the recent printing expo, drupa 2012 in Dusseldorf, there was a lot of activity by U.S.-based companies. "I spoke to many owners who are placing orders for new equipment throughout their plants, just like James [Gordon] did. The OEMs are reporting a very strong year. Reading the trade press, we see lots of capital purchases and plant upgrades in both small and publicly traded organizations."

Overseas competition

Many folding carton manufacturers have struggled with international competition, especially from Asia. Emerging markets have undercut American pricing, driving some packaging business overseas. But now that wages are finally on the rise in these emerging nations, their prices are starting to increase, which is making American firms competitive once again.

According to Eldred, working with a packaging company from overseas is not always what it seems. "Many companies hired overseas packaging companies for their cheap prices but what they find when they look at total delivered costs, including increased freight, late deliveries, and off-spec product, American packaging companies are actually less expensive."

Dan Shedd, president of Taylor Box Company located in Warren, R.I., asserts that "there are three elements that enable American carton manufacturers to compete with Asian offshore suppliers: cost-cutting technologies, customers who value creativity and value-added design, and speed-to-market via flexible manufacturing."

Converters are also seeing an increase in the number of SKUs for any one product and smaller purchase quantities, thus increasing the amount of short print runs. To keep up with this new requirement, converters are now investing in digital technology and short-run printing presses, and purchasing faster, more efficient equipment. Short-run printing and converting is a bright spot for U.S. converters. Being able to get the customer only what they need on short notice closes out offshore competitors.

Asked about prospects for the near future, Steve Levkoff, chairman of the Jackson Heights, N.Y.-based The Standard Group, says, "Our family has been in the carton business for over 80 years. The recession was as bad as I've ever seen, but we made it through, and we're growing again. In 2012, we've made substantial investments in equipment and technology to make ourselves more cost effective. But far beyond our investments in equipment and technology, our industry has a tremendous story to tell."

What's ahead

In the 2012 PPC Trends Report, RISI predicts that shipments of folding cartons are forecast to grow at a 0.5 percent average annual pace between 2012 and 2016. While modest, growth is steady and forecasted to continue. It is expected that the pharmaceutical industry will offer the greatest opportunity for folding cartons during the next five years, followed by dry and frozen foods, food service/carry-out, and beverage industries. Although demand for rigid box-making volume will continue to decline, this industry is expected to maintain its hold on the high-end confectionery and perfume markets.

"Paperboard has a terrific story to tell, and we are working hard to educate consumers and consumer goods companies about the benefits of paper-based packaging," Markens says. "In general, members tell me that they are cautiously optimistic about 2013 and beyond." pP