Folding Cartons: Fighting on Several Fronts

The folding carton packaging market is working through some challenging times. Integrated companies and converters/printers alike are dealing with such issues as rising energy costs, overcapacity, overseas competition, and alternative packaging solutions.

Despite these challenges, or more appropriately, because of them, industry players are circling the wagons, focusing on the strengths of their product attributes and making the difficult decisions required to consolidate and reduce costs.

Commenting on his outlook for Smurfit-Stone Container Corp., Patrick J. Moore, chairman, president, and CEO, states, “The company faces critical challenges and opportunities as a result of dramatic shifts in the market that call for a profound change at Smurfit-Stone. We recently announced key strategic initiatives to address market realities and are fully engaged in executing this plan. These initiatives include changes in key operating management positions, actions to drive lower costs in our manufacturing system and achieve specific cost and performance targets, and kicking off a customer-focused approach to the marketplace that should provide the foundation for long-term improvement in our results.”

With these initiatives and changes in the market, Moore sees some bright spots. “Market conditions have finally begun to improve. Packaging demand has rebounded, our inventories are at their lowest level in years, and we are implementing previously announced price increases and cost reduction initiatives.”

His comments provide a summary view of the market/business climate faced by companies in the folding carton packaging industry. The Freedonia Group, in its study titled “Corrugated & Paperboard Boxes” released in November 2005, projects the demand for corrugated and paperboard boxes to increase 2.1 percent per year to more than $34 billion in 2009. Specifically for folding cartons, it sees more modest increases through 2009 as this packaging medium faces “intense competition from alternative packaging.” However, Freedonia believes the folding cartons segment “will benefit from advances in printing and paperboard graphics capabilities, as well as a positive environmental image.”

According to the study, food and beverage will continue to be the largest market, accounting for 40 percent of the corrugated and folding carton demand through the period. Beer and soft drink beverage carriers, as well as growth in food products will be important factors in maintaining this strong position.

2005 in review

In its end-of-year Market Flash Report, the Paperboard Packaging Council (PPC) reported that folding carton shipments reached an estimated $9 billion and 5.7 million tons in 2005. These levels reflect a 2.6 percent tonnage decrease and a 0.3 percent decrease in dollar value.

PPC attributes the decrease in tonnage to slower-than-expected industrial production, especially in the first half of 2005. However, despite the decrease, 2005 was the second highest level over the last five years, coming off a strong performance in 2004.

Tony Petrelli, vice president, marketing and business development for Caraustar Industries, says 2005 “was another tough year for the folding carton industry. Although we are seeing more and more of the mill capacity in the industry being reduced, it was still extremely difficult to obtain carton price increases.” He attributes this difficulty, in part, to “the purchasing leverage of the large consumer packaged goods companies [which] kept the increases at a minimum, if any.”

John Zeiser, president/CEO of Southern Champion Tray, reported “a pretty good year, but most volume gains were offset by cost increases in board, supplies, and freight.” He believes that improved margins will be “difficult to come by until excess capacity is shut down.”

The significant rise in energy costs directly or indirectly impacted most of the cost increases. Jerry Van de Water, PPC president, acknowledges the impact that this has had on converters.

“Energy has been a major factor on the mill side, and so converters have had to cope with cost pass-through. ... For converters, the increased cost of energy that is reflected in the price of raw materials cannot be easily passed along to packaging buyers. Carton suppliers therefore, need to be thoughtful about how to communicate with customers about raw material cost increases, coupling notices with good, creative thinking on changing specifications or other requirements to soften the impact of rising prices.”

2006 and beyond

At the end of last year, PPC released its annual report titled, “Trends: Industry Outlook and Market Data Report.” Prepared by RISI, a division of Paperloop, it has a somewhat more promising outlook for 2006 and 2007 saying that “most segments of the market should recover within the next two years.” Its 5-year projections call for tonnage to increase at an average annual rate of 0.4 percent from 2005 through 2009, with a more substantial average annual rate of 3.8 percent when measured in dollars.

One aspect of the folding carton industry in which there is solid consensus is that of consolidation. “It’s unavoidable and necessary,” says Zeiser.

Van de Water puts a twist on the approach companies are taking to consolidate. “We see consolidation continuing across the board … but with a difference. Most of the majors realize that big is not in itself, a strategy. The more progressive firms are ‘smartsizing’ or evaluating operating units for fit with strategy and goals for overall performance; the right units will receive further investment while the less efficient units will be sold or closed.”

Innovation will be a key for survival and growth, not just in the folding carton segment, but in virtually all packaging areas. Folding carton converters have been using progressive packaging techniques for some time now to improve the graphic appeal of their product.

“There’s much greater use of holography, foils, and special coatings,” says Van de Water. “Foil effects are being achieved in-line with newer inks, and more converters are acquiring off-line foil stamping systems as well.”

Petrelli points to a continuing growth in the use of web presses. These will “allow you to provide more colors, in-line laminating for enhanced graphic looks, and in-line diecutting that, overall, will provide better packaging at lower costs.” In addition, he says, “We will also continue to see more use of metallized poly laminations and hologram images to help shelf impact, coupled with more UV printing for added gloss.” Out in time, he says, RFID and smart packaging applications such as sound and thermochromatic inks will start to become more prevalent on the store shelves.

In the PPC Trends Report, RISI points to pharmaceuticals, beverages, and frozen foods as the three strongest markets for folding cartons. It bases this projection on the growth in consumer spending in these segments over the past several years, a trend that is expected to continue.

Petrelli agrees on the opportunities for folding cartons in these markets. “Any food-related product that fits into the new consumer trends of ‘on-the-go’ and portable convenience will remain very strong for folding cartons, such as snack foods, candy, and healthcare supplements. In addition, many of the newer ‘unit dose’ packages that are becoming very popular with the drug companies will add newer opportunities for the folding carton market.”

Facing up to the challenges

Besides the series impact from spiraling energy costs which is affecting manufacturers across the board, the folding carton industry is faced with other serious challenges.

Zeiser discusses the challenge of competing with overseas manufacturing while dealing with the burdens of U.S. regulations. “The packaging industry, overall, exists for one purpose—to serve manufacturers of other products. If they are thriving here, we have a great future, because folding cartons are unique in their versatility, print surface (billboard effect), stackability, and use of a renewable resource. If manufacturers continue to leave the U.S., the domestic market will continue to deal with low margins and capacity reduction.”

When facing foreign competition, Zeiser believes “the larger problem is the U.S. regulatory environment. We can compete on a productivity basis, but not when our ‘regulatory overhead’ is significantly higher than other countries.” He says the folding carton industry needs a more united, concerted effort to “impact the market for the common good of the paperboard packaging industry.” Another serious challenge comes from the growing use of stand-up pouches and rigid plastic containers, says Petrelli. “Although folding cartons are a much better package for printability, shelf impact, and billboard branding, the resin-based packages are better for barriers and freshness needs. You are seeing more of this in pet treats and oil-based snack foods.”

Focus on the customer

Faced with the challenges from within and abroad, projections for the folding carton packaging segment show a future of relatively stagnant demand. At times like this, companies need to be focused on being an indispensable part of their customers’ supply chain.

“We encourage our member companies to see themselves in the eyes of customers and develop the ability to quantify the customer-value proposition,” says Van de Water. “The more progressive converters have a firm grip on delivered value and what their product/service offering means to key accounts. These are the folks who are regularly hitting the sweet spot of profit and growth.” n

Resources

Caraustar Industries www.caraustar.com

The Freedonia Group www.freedoniagroup.com

Paperboard Pkg. Council www.ppcnet.org

Southern Champion Tray www.southernchampiontray.com