Beauty and
 the Beast

In an overall economic environment stuck somewhere between uncertainty and maybe even foreboding, the tag and label industry still has energy and a dynamic thread driven by innovation and opportunity. This is the good news for those companies involved in the tag and label printing industry—printers continue to help their customers compete effectively on the store-shelf battleground with creative, eye-catching product decoration techniques.

A good year

2010 was a turn-around year, recovering from "the pits" of 2009. The overall growth of the North American label market for 2010 was estimated at 3.0 percent versus 2009, according to AWA Alexander Watson Associates in its study, "Labeling & Product Decoration Markets: Global Review 2011," released in March. Coming out of the recession, this was a much-needed, positive development.

The growth in the different product decorating methods continued along recent trends. AWA reports that N.A. pressure-sensitive (p-s) labeling grew 5.5 percent and sleeve labeling at 7.0, while glue-applied labeling demand decreased about one percent. Overall, AWA says that in 2010, pressure-sensitive labeling in N.A. had about a 48 percent share of the labeling market, followed by glue-applied at 33 percent and sleeve labeling at 13 percent.

Challenges ahead

The primary challenges for label printers stem from two root issues: the overall sluggishness of the current post-recession recovery and the highly fragmented nature of the tag and label supply base (coupled with a sense of over capacity).

U.S. GDP growth is a highly watched economic indicator under normal circumstances, but has been under increased scrutiny throughout the 2008-2009 recession and this subsequent poor-excuse-for-a-recovery. It is important to the tag and label market because, as AWA points out in the study, "These economic growth figures are indicators for label demand. From historical patterns, label market growth in developed regions will broadly follow these economic growth patterns."

The forecasts are moving targets and, in themselves, can reflect the volatility and fragility of economic conditions. As an example, the Federal Reserve in its most recent forecast for U.S. economic growth released mid-June, predicts 2011 growth between 2.7 and 2.9 percent. This was a downward revision from April when the range was 3.1 to 3.3 percent.

One of the reasons given for the downward revision was a recent rapid rise in gasoline prices and the resulting impact on consumer spending. That petroleum-based product pricing is volatile (with gasoline right up there at the top of the volatility chart) will not be news to those in the labeling industry. Petroleum-based commodity pricing has been volatile for many months now, with the volatility mainly in an upward directly. A significant number of ink, coating, and adhesive suppliers have increased prices in the past year, along with many substrate suppliers, including both film and paper.

This is putting a squeeze on tag and label printers, many of which are relatively small companies caught in the middle between big suppliers that are starting to increase prices and big customers that are under such competitive pressures themselves that they won't accept price increases from their suppliers. All in all, conditions such as these favor larger companies that can leverage their own size when it comes to price negotiation on either side of the supply chain.

So even though the recession is technically over, many companies are seeing the erosion of profit margins. This, coupled with the fragmented nature of the industry, means that merger and acquisition activity will continue for some time. According to the AWA report, "The companies involved in labeling and product decoration—as suppliers of raw materials, equipment, label laminates, printers/converters, and end users—have been the ongoing subject of consolidation. Fragmentation is highest at the printer/converter point of the value chain, and merger and acquisition has been a feature of this and other points over recent years."

The M&A activity level was busy earlier this year with several well-established label printers announcing acquisitions. In a matter of about two weeks, Smyth Companies acquired Dow Industries; CCL Industries acquired pharmaceutical label company, Thunder Press; and Hooven-Dayton completed the acquisition of Benchmark Graphics. Transactions such as these will most likely continue for several more years as the tag and label printing industry begins to look more and more like its cousins in the flexible packaging and folding carton segments, i.e., fewer, larger companies.

The transactions mentioned above are typical of domestic M&A activity, but this doesn't tell the whole story. Some of the larger companies, such as CCL Industries and Multi-Color Corporation that already have an international presence, are using both M&A and partnership arrangements to expand in global markets.

After last year's acquisition of Purbrick Ltd., an Australian pharmaceutical label printer, CCL Industries recently expanded its footprint in the Middle East, India, and Indonesia. It has agreed to acquire a 50 percent interest in Pacman-CCL, based in Dubai, and in a separate transaction, signed a license agreement with PT. Master Label, an Indonesian manufacturer of pressure-sensitve labels and plastic tubes.

Multi-Color (MCC) has been especially active in overseas expansion, which is consistent with President and CEO Nigel Vinecombe's comments in his Shareholder Letter in the MCC 2010 Annual Report. "The global label market remains highly fragmented and presents significant growth opportunities. Multi-Color already has a leadership position in international label supply and is well positioned to expand its global footprint," he said.

Just since September of last year, MCC has in relatively quick succession acquired a French wine label specialist; received government approvals to establish label operations in Guangzhou, China; expanded facilities in Paarl, South Africa for its existing labels business; acquired an Italian wine label company; agreed to buy 70 percent ownership in two label operations in Latin America, one in Chile and one in Argentina; and most recently, acquired a consumer products and spirit label company in Poland.

Digital watch

Digital watches broke into the market in the early to mid-1970s and just like everything else it touches, digital technology made a significant impact. Package printing will be no different, and in the tag and label segment, particularly, digital printing technology is making noticeable market penetration.

The reasons for this are two fold. First, digital printing is primarily effective in shorter run print applications, which matches perfectly with trends in the consumer products markets for smaller volume, targeted product decoration requirements. Every indication is that these trends will continue.

For tag and label printing, the second reason for digital printing's penetration is that the initial technologies available are in narrow-web formats that are the bread-and-butter for label printing. This is one reason why Karstedt Partners, a consultant and market research firm specializing in the adoption of digital technologies in consumer product and packaging markets, predicts that digital printing will be a market driver in the narrow-web label sector, more than just a niche technology.

With a growing number of label printers obtaining digital printing capabilities, it is pretty clear that it is already having a significant impact. For the foreseeable future, digital printing will be an important complementary technology working alongside the more traditional technologies.

The road ahead

The good-old days are gone. There was a time when virtually any reasonably good label printer could be very successful and earn a good return for its efforts. Not so today; the competitive environment requires printers to be lean, nimble, and on top of their games at all times. Profit margins are too thin, and for many, consolidation through mergers or acquisition is a real possibility and maybe the best option available.

AWA also raises another point. In addition to the competing labeling methods, other packaging formats compete with labels by "denying the opportunity to any form of separate label," notes the AWA report. These include such formats as flexible packaging, cartons, and direct printed containers.

By all accounts, the North American label market will continue to grow at a steady clip and the majority of printers will enjoy continued success. For this to happen, though, they will need to invest in the latest technologies, innovate, and, especially, be an invaluable resource to their customers.