Label industry Metamorphosis
The tag and label printing industry appears to be changing in ways that may qualify as a metamorphosis.
by Tom Polischuk, Editor-in-Chief
"THESE ARE INTERESTING times." So says Tim Hare, CEO of York Label, as he looks at the current state of the tag and label printing industry.
This industry, built long ago on the enterprising backs of entrepreneurs, seems to be maturing. It faces many challenges brought on by fierce competition and a promise of highly dynamic market and technology changes that will continue.
A recovery with a different look
The economy is picking up steam, and many people are waiting for the traditional "good times" that come with it. Except this recovery may be different.
"Everybody seems to be waiting for a turnaround," says Hare, "but I'm not convinced a turnaround is coming. Volume may pick up slightly, but you can't live off 2-3 percent volume growth. You have to take market share or get into new markets."
Vince Naselli, director of TrendWatch® Graphic Arts, shares this sentiment. In support of TrendWatch's Printing Forecast 2004, he says, "Trend after trend shows that the economy rebound is not going to significantly help printing companies turn sales around. … The numbers indicate that an economic upturn will not translate into an upturn for printing demand. Instead, printers and vendors need to change their business models to reflect the needs of today's new business environment. Our analysis indicates that printers need to become more familiar with digital printing, short-run color, personalization, value-added services, cross media, CIM, JDF, and CIP4."
Although TrendWatch focuses on a broader segment that includes commercial printing, the thrust of the message rings true in the packaging sector.
In a broad sense, Hare sees the industry becoming less entrepreneurial and more business oriented. "Our industry needs to become more measurement driven, more focused on what I would term 'process manufacturing.' Although a company needs a balance of both entrepreneurial and business elements, the companies that are going to win market share are those that have the best cost structure."
Part of the package-printing dilemma comes from being caught in a supply-chain squeeze, wrestling at 100 lbs. while being thrown into the ring between two Sumo wrestlers. Many times package printers find themselves being out-leveraged by large suppliers on one side and large customers on the other.
In Hare's view, the label printing industry will follow the flexible packaging industry "where you have several large players." Consolidation will be part of the picture, but some companies will just go out of business. "Out in time, there will be a smaller number of printers," he predicts.
Right now though, the large number of label printers is adding to other difficult conditions, says Dennis Hulton, VP/GM of Valley Forge Tape & Label Co. "The proliferation of tag and label printers over the past 10-15 years has created a strong 'buyer's market' for label users," he states. This situation is aggravated by other market conditions including mergers and acquisitions among customers and reverse auctions that have been driving prices downward. On a positive note, Hulton (and others) seem to think that the reverse-auction craze is subsiding.
The 2003 pressure cooker
Many label printers are probably glad that 2003 is behind them. According to Hulton, it was a year that was difficult for many label printers due to the extreme pressure on pricing, and he believes that the pressure will continue through 2004.
The effect of this pressure, especially from the consumer products companies (CPCs), is mentioned in the just-released Tag and Label Manufacturers Institute (TLMI) "North American Label Study (NALS) 2004" (copyright LPC, Inc., courtesy of the TLMI). It says, "… the modus operandi of CPCs and other institutional label procurers in the past three years has been to, first and foremost, implement supply chain strategies that cut costs. This issue remains a central one to the pressure-sensitive label converter in 2004, and these initiatives will continue to affect the success, or failure, of label converters to combat margin erosion and maintain customer loyalty."
According to this study, the pressure-sensitive label market—the major segment for many label printers—grew at an estimated 3-3.5 percent in 2003. As the U.S. economy continues its slow recovery through 2004, "pressure sensitive labelstock growth is expected to also climb, albeit at lower-than-expected annual increments," it predicts.
John Bankson, president/CEO of Label Technology (Merced, Calif.) and current president of the TLMI, said the business impact in 2003 was dependent on the markets you were in. He observed that the label market was basically flat in 2003, with some growth in niche areas. Although optimistic about 2004, Bankson sees the industry facing serious challenges from customers to become more efficient and provide complete solutions.
Challenges and opportunities
Although cost pressures will dominate the coming year, there are other challenges to contend with. Those label printers who have made their mark at the high end of the quality spectrum are facing more and more competition, says Hare. "The prepress side of flexo has leveled the playing field from a quality standpoint for those printing high-end labels. Where there may have been five companies that used to be able to do the most difficult work, now 50 can do it."
Another challenge comes from the loss of business to overseas competition, and it won't come from just being out bid. Both Hare and Hulton observe the migration of larger companies' (customers) manufacturing operations to overseas locations.
York Label, for example, currently ships products to many overseas manufacturing sites for its customers. Hare believes it's just a matter of time before these locations develop a local source of supply, and he is already making plans for replacement business.
This type of forward thinking is needed if label printers are to maintain viable businesses, or especially, if growth is planned. Some of the areas in which pressure-sensitive materials are losing ground must be viewed by label printers as opportunities.
TLMI's NALS 2004 states: "As SKU proliferation means more products per category flashed in front of consumers on store shelves, end users look outside pressure sensitive for labeling options that might promise aesthetic differentiation and a boost for the brand."
The study points to wraparound non-pressure sensitive labels including shrink, stretch, and non-shrink substrates as a market with impressive growth rates. It predicts the shrink sleeve labeling market to grow 12-14 percent annually through 2007, exceeding $450 million in converter sales by 2007. It cites market drivers for this category as differentiation, its billboard effect, more container contouring, and blow-molded container growth.
In line behind shrink labels, the study predicts that in-mold labeling (IML) will grow 4.5 percent in 2003 and 5-6 percent annually through 2005. Its drivers include: new inks and adhesives that will open up a wider range of applications; clear IML materials that provide a "no-label look"; and more hot filling in the food and beverage sector that plays into the hands of IML's ability to withstand higher-temperatures.
Another significant market opportunity rests in the broad and growing smart-labels segment. The Freedonia Group, in its "Smart Labels" study released in December 2003, expects this category to expand more than 14 percent annually through 2007, approaching 11 billion units valued at $460 million. By 2012, the study projects a market of more than 30 billion units, worth more than $1.2 billion.
Radio frequency identification (RFID) is singled out in the "Smart Labels" study as the segment that offers the greatest potential for gains. It projects the market size for RFID labeling to triple each year off a small 2002 base, and RFID "holds the potential to revolutionize supply chain management and logistics operations across a range of industries." Its major hurdle is cost, but as on-going developments bring unit costs down, RFID has the potential for new markets with huge volume opportunities.
Other smart label technologies mentioned in the study include interactive packaging labels. These include color-changing labels for promotions, thermochromatic labels, time/temperature indication, and pharmaceutical compliance labels.
For those label printers that may not be looking at such high-tech options (at least in the short term), Hulton points to the "increased demand for more and more information printed on smaller spaces. Converters who have the capability to produce folded coupon labels, adhesive side printed labels, and any other form of 'extended-text' constructions will find expanding markets in these areas."
Bankson emphasizes the need for a broader focus from tag and label printers. "As we become better known as the narrow-web solution provider to the packaging industry, more opportunities will surface. In addition to product decoration, there will be RFID, smart labels, narrow web, and flexible packaging of all types, including digitally printed flexible films."
Strategies for the label printer
A focus on cost and manufacturing efficiency is a critical component for success for any printer in the tag and label industry. Hare emphasizes the importance of lean manufacturing and "continuous improvement as a mantra." In today's environment, quality and service are a given, so looking for ways to add value for customers is an additional requirement.
Hulton also highlights the need for improved efficiencies. "Streamlining workflow through greater utilization of the capabilities of management software programs, improving production efficiencies by keeping equipment current and continuing to replace obsolete equipment with modern 'quick-change,' higher speed equipment will be major factors in achieving this goal."
In many ways, it appears that the tag and label printing industry may be going through a metamorphosis. Whether the result is good or bad will probably take on an individual view based on a company's success or failure.
Hulton sums up his view of the future business environment. "For many years, the label printing industry has been interesting, dynamic, challenging, sometimes frustrating, but always rewarding to those who exercise reasonable discipline, innovation, and creativity in their operations. I think this same industry in the future will prove to be very unforgiving of those who fail to respond to an ever-changing business environment."
Resources
The Freedonia Group www.freedoniagroup.com
GATF http://gain.net
LPC, Inc. www.printamericas.com
TLMI www.tlmi.com
TrendWatch Graphic Arts trendwatchgraphicarts.com