What Will It Take to Survive?

Events during the last six months have made research for this article a real challenge. It’s almost like writing an article on the state of the commercial airline industry for the November 2001 issue of “Your Aviation Monthly Magazine.”

The global economy is not what it was just a year ago. At that time, we had our share of business challenges to contend with—among them increasing energy prices, with related increases in manufacturing and raw materials costs. The clouds on the horizon, while looming large at the time, were just the leading edge of the economic tsunami that was building up steam just out of sight a short year later.

Just like manufacturers, when consultants can leverage their investments in two projects at the same time, there are economies and efficiencies. I am currently working with State Street Consulting to write a study titled “Global Trends in Packaging Affecting North American Converter and Supplier Markets” for PRIMIR (Print Industries Market Information and Research Organization, www.primir.org) that is scheduled for completion this summer. So leveraging the double opportunity to talk with contemporaries all through the packaging supply chain has helped on two project fronts and has led to some interesting insights. While conversations were candid and often confidential, most of those interviewed were as eager to give their perspectives as they were to see what others think about the state of our industry. As a matter of fact, most reflected that the state of our industry runs parallel to the state of our global economy.

Managing volatility

If there is a silver lining on the economic front it is the cost of oil coming out of the stratosphere to a more rational price. As of this writing the price of crude oil is $37.90, down from a high of almost four times that value, with www.oil-price.net showing a one-year forecast of $44 per barrel.

This reduction has finally begun to have a positive effect on packaging raw material costs, with resin prices falling substantially from the high levels they have been at for the last 3 to 4 years. This downturn in resin pricing is resulting in customers asking for price reductions or even putting off buying decisions, and instead, waiting to see if prices will go down further.

Managing the extreme economic and raw material price volatility is a challenge converters in every packaging sector said they would need to work through. Price volatility is affecting raw materials from resin to paperboard, and inks and coatings to silicone. Successful companies in any industry should try their best to understand how their customers are going to manage the economic volatility and how that will affect the rest of the supply chain.

Sustainability

Related to oil prices, sustainability seems to have taken on a bit of a different look by many converters. Companies are now looking at sustainability as a way to save money instead of the “purist” view of saving the planet. Looking at the big picture, companies throughout the supply chain are still “green conscious,” but behind the scenes the rationale is for immediate cost reductions and savings. Green initiatives like recycling, down-gauging, and waist heat recapture are more prevalent.

There are few converters who have totally sat out of the sustainability game so far, but it would be accurate to state that some have been in the game with more vigor than others. My conversations with converters revealed that those who have longstanding relationships with their customers, working on joint cost-saving initiatives with both short- and long-term scopes are in the best position today.

In the flexible packaging segment a great deal of R&D resources have been spent over the last few years on nonpetroleum-based films and bio-based PLA (polylactic acid) films. Most agree that these initiatives need to continue since petroleum-based substrates will need to be phased out over the next 15 to 20 years, simply due to allocations of diminishing petroleum resources. What materials end up fulfilling the needs of end users and converters in 2020 will, to a great extent, be affected by research currently being done.

Markets

Historically, industry articles such as these discuss the current and projected trends in each of the major packaging markets. However, it is difficult to state that a trend showing itself last summer will continue to be relevant now that the global economy has taken center stage. Markets in every industry are being significantly impacted the state of the general economy.

This notwithstanding, some top-notch research is available for those who wish to understand trends and market dynamics in specific markets. In its study, “Labeling Markets North American Market Study and Sourcebook 2008,” Alexander Watson Associates BV (www.awa-bv.com) of The Netherlands, establishes the value of the global label market in 2007 at $72 billion, with North America accounting for 28 percent of that total. The study also notes that the growth rate for labels in North America has declined from previous levels to a yearly average of 2.6 percent, with sleeves growing at 5.8 percent and pressure sensitive’s growth rate at only 1.7 percent. An updated global review is soon to be published by AWA to address how the label market has changed with the recent economic events.

In a study published in January 2009, “Paper versus Plastic in Packaging,” The Freedonia Group (www.freedoniagroup.com) sees plastic materials outpacing paper, growing 2.4 percent per year to 2012. This is seen in part by the “…conversions from gable-top cartons in schools and quick service restaurants.”

The paper products industry has seen substantial consolidation that is likely to continue. The industry has taken many painful steps to reduce overcapacity that will have long-term benefits. In a Jan. 12, 2009 Longbow Research (www.longbowresearch.com) report “Paper & Forest Products Weekly Summary,” Longbow analysts—who rate 168 companies in the sector—rated 47 (28 percent) as “buy,” 119 (70.8 percent) as “neutral,” and only 2 (1.2 percent) as “sell.” This is a testament to the work the sector had done before the economic downturn.

Consumer packaging

Packaging has often been referred to as a “recession-proof” industry; how true that is for individual companies still remains to be seen, but in the bigger picture, there is a lot of truth to it. While we pull ourselves through this crisis, people will still consume and shop, but they will do so in different ways.

In the consumer products sector, there has been a great deal of activity on both sides of the value chain. Retailers have been making room on their shelves for more private label brands that can save cost-conscious consumers on products from toilet paper to lawn mowers. In my interviews of converters, many noted an increase in the amount of private-label packaging being produced. On the positive side, the trend in recent years for high-quality packaging for private-label products is helping offset the loss of brand name products from the production mix.

On the other side of the value proposition coin, The Nielsen Company (www.nielsen.com) reports in its “Consumer Insight, February 2009 – Issue 15,” that consumer product companies are still moving ahead with high-end product launches. The report states, “Many would be surprised to learn how many premium-priced initiatives are active in-market right now—over half of the items that Nielsen is tracking are priced at a premium to their parent brand and/or respective category.”

Managing investment

Managing companies’ internal investments has always been a key strategic challenge for management; in troubling times it has even more importance. It is increasingly important now to avoid the stigma of being a “me too” supplier. Innovation development that helps to differentiate one supplier from another is as important today as it ever has, maybe more so.

From one CEO I spoke with, “We are all resisting the impulse to pull our horns in and hunker down for a long, cold winter. What we need to do is continue to work as closely with our customers as we can and invest in projects that benefit those customers and improve our bottom line.”

Consensus among those I interviewed for this article is that the acute part of this downturn will last 12 to 24 months. For most large converters, major projects and customer initiatives take 12 to 36 months to develop. While many of these projects have been scaled back and some even mothballed, most are still moving forward, betting that the economy will have recovered by the time the project is completed.

Profile of the survivors

It is safe to say that companies that were strong when the downturn started have the best chance of weathering the storm. Companies with strong financial standing in 2007 were not there because they were treading water. They had to invest correctly, have the right customers (and serve them well), have the best employees (and treat and train them well), and have products and services that are priced right and in demand.

The consensus is companies with strong customer ties and niche products and services that remain in high demand are well suited to weather the crisis. These are usually small- to mid-size companies that are not providing commodity products. Likewise, larger converters that have longstanding and strong customer relationships that can leverage these strengths are well positioned.

A common theme at conferences and trade association meetings across all packaging segments is the need to understand and work closely with customers. Really knowing your customers entails much more than just having the annual customer appreciation picnic and golf outing. It means sharing in their development efforts and working shoulder-to-shoulder with them in projects that will bring value to both companies.

For those converters that are investigating or even planning to invest in areas such as digital printing, printed electronics, RFID, smart labels, brand security, or a host of other opportunities, if it is the right thing to do, do it. Just like the companies that were strong going into this crisis have the best chance of survival, those companies that are able to emerge strong (regardless of how they went in) will be the long-term winners.

Final thoughts

Earlier this year, the drama that unfolded with US Airways Flight 1549 got much well-deserved attention. Just like the crew that successfully landed that plane in the Hudson River, management and line workers alike will need to work together through challenging times to save our companies, our jobs, our reputations, and those of our coworkers.

I recently heard two simple comments that ring loud and clear; first, the old adage, “With all crisis comes opportunity,” and second, a slogan used successfully by Bill Clinton’s presidential campaign in 1992 (in a previous recessionary period), “It’s the economy, stupid.” pP

Kevin Karstedt is president of Karstedt Associates, Ltd. His firm works with brand owners, package printers and converters, and companies that develop tools for use in the package development and printing industries. He can be reached at 716-992-2017, or by email at kevin@karstedt.com.