Folding Cartons: A Strong Message

The folding carton industry has some substantial positive qualities, which, in the long run, should bode well for its future. Two noteworthy aspects are its strength in the food and beverage markets and its position as a renewable resource. However, in light of the global economic meltdown, no industry escaped unscathed—2008 was a very challenging year all around.

"Obviously, 2008 was one of the most difficult years in recent folding carton history," notes Tony Petrelli, president of CardPak (www.cardpak.com). "At no time in my 25 years in the industry have I seen double-digit declines in sales such as the ones that occurred during particular periods this past year."

According to Petrelli, who is also chairman of Paperboard Packaging Council's (PPC, www.ppcnet.org) board of directors, PPC's data indicated that the industry was down almost 1.5 percent in 2008 in the dollar value of product shipped and more than 3.0 percent in volume (tons) produced.

"Last October, the industry took a dive," said Ben Markens, PPC president. "Volumes went down in a hurry." This trend is continuing into 2009 as Markens reports that shipment tonnage is down just less than 5 percent and inventories are down 10 percent year-over-year through June. In addition, he said preliminary indications show a slight margin compression in 1Q09.

The American Forest & Paper Association (AF&PA, www.afandpa.org) reports similar data for folding cartons in its most recent June 2009 industry report. It compared the first half of 2008 production with that of 2009. The 3,481 tons produced in 2009 was 10.1 percent lower than the 3,873 tons produced in 2008. This large percentage drop can be attributed to the first part of 2008 being relatively more robust than later in the year.

AF&PA further reported that capacity utilization for solid bleached packaging was at 85.4 percent in June 2009, down 11.2 points from June of 2008. However, this was up 6.1 points versus May 2009, while overall paperboard production increased 3.8 percent from May to June 2009.

Graphic Packaging International's (www.graphicpkg.com) second quarter report also indicates a positive trend. "I am pleased with our strong performance in this difficult operating environment," said David W. Scheible, president and chief executive officer. "Total tons sold increased 4.5 percent from the first quarter, reflecting the recessionary-resistant nature of our food and beverage packaging business."

In RockTenn's (www.rocktenn.com) 2008 Annual Report, James A. Rubright, chairman and chief executive officer, noted the relative strength of some of the markets RockTenn participates in. "While we have seen some demand erosion, our focus on packaging for food and beverage, paper, health and beauty, and other consumer nondurables should moderate the recession's impact on our sales," he said.

Foreseeable future

Markens is starting to see what he calls "green shoots," with the business environment starting to loosen up. "There seems to be a glimmer of hope; people are becoming somewhat more optimistic," he said. "I am cautiously optimistic for the last half of 2009."

Petrelli is also seeing indications of a turnaround. "Although I'm certainly not an economist, I have seen some encouraging signs of recovery with recent increases in our own company's backlogs and new project activity from major customers and key target prospects. I think the balance of 2009 will be much stronger than the first half and that opportunities for 2010 appear to be bullish at this time. As we are currently developing our 2010 operating budget, we are forecasting a top line growth for the first time in two years."

According to much of the economic news indicating the end of the recession, the "running of the bulls" will look more like a slow walk up Pikes Peak. All indications are that it will be a long and bumpy road. This is, in part, reflected in Markens' prediction on specific key markets. "Hardware will be most unfavorably impacted over the coming years, and our economist predicts only two growth markets—pharmaceuticals and dry goods," he said.

Some overcapacity still exists in the industry that could lead to more plant closings and more consolidation, according to Markens. In 2008, the industry saw some noteworthy acquisitions—Graphic Packaging of Altivity, RockTenn of Southern Container Corp., and International Paper acquiring some units of Weyerhaeser. "I don't think there are many mega deals out there. However, there could be more targeted, strategic consolidations," he said.

Opportunities

Like all industries today, the folding carton industry faces stiff competition on many fronts, not least of which are the innovative new packaging options emanating from the flexible packaging sector. Folding cartons, however, have strong positions in some key market segments—such as food and beverage and pharmaceuticals—and stack up well on the sustainability front.

"Sustainability will be a key differentiator for paperboard packaging. It's here to stay," said Markens. "Paperboard has a good story to tell, especially compared to some competing alternatives such as flexible packaging."

Two of paperboard's primary selling points are its renewability and its proven track record in the recycling arena. "Paperboard is renewable—unlike oil-based films—and recyclable," he said. "We will run out of fossil fuels at some point in time, plus recycle rates [for plastics] are very low—in the single digits. Paperboard recycle rates are approaching 60 percent."

Petrelli shares this view. "From all of the indicators I have seen and studied, I see the paperboard converting and folding carton markets growing in the short term. Regardless of the propaganda and marketing savvy of plastics and other alternative materials to paperboard, the reality of the environmental advantages of paperboard will never be replaced."

Strategies for success

At times such as these, it is important for companies to remain focused on what they do best. "Stick to your niche, your core business," advises Markens. However, this doesn't mean sticking your head in the sand. "For opportunistic people, there are opportunities to be had," he says.

At CardPak, Petrelli has pursued opportunities through product innovation and enhancement. "We have taken a product development approach to finding folding carton and paperboard converting opportunities that are more material replacement strategies than top-line strategies that require market growth," he said. "Our growth has been in plastic packaging replacements and not internal cannibalization of the existing paperboard market. I like the idea of creating opportunities through innovation rather than pursuing pricing decreases to try and get more of less."

For the overall industry, Petrelli believes a focus on sustainability and efficiency will be a good one-two punch. "I see the need for companies in our industry to continue to find new and alternative sources of energy and to develop more Lean Manufacturing processes and systems that improve manufacturing efficiencies and lower production waste. I am hoping that by now all companies are becoming passionate about identifying their own carbon footprints and doing everything possible to lower their own environmental impacts."

Sustainablity and Lean—two good paths on the road to success. pP