Million-dollar Label Questions

Pressure-sensitive label price pressures and competition may be heating up, but so are lucrative opportunities in film constructions, variable information, and product branding.

By David Kucsma

The pressure-sensitive label industry is a complex market, comprised of a number of segments with unique growth drivers and growth rates. Suzanne Zaccone, president of Graphic Solutions and the Tag and Label Manufacturers Institute (TLMI), believes the growth in pressure-sensitive labeling is a reflection of the overall health of the economy, driven by new product development.

Feedback from base material suppliers and converters indicates the pressure-sensitive label marketplace grew 5 percent to 7 percent in sales dollars in 1999. The November 1998 TLMI North America Market for Pressure-Sensitive Label study forecasted a 1999 growth rate of 6.4 percent and label sales of $4.2 billion. Though this rate is less than historical double-digit growth, it does represent healthy gains.

The TLMI study forecasts the growth rate will remain around 6.4 percent over the next three years, while additional expert consensus confirms a continuation of the 5 percent to 7 percent rate seen in 1999. To cash in, label converters must keep tabs on the changing answers to key industry questions.

Which markets are hot?

Film. John Wurzburger, vice president/general manager of Fasson Roll North America's Premium Packaging & Pharmaceutical Division, says film-based labels garnered the fastest growth in 1999, with applications rising at a rate of 10 percent to 15 percent.

Gary Stover, marketing director for Technicote, finds particular film momentum in food and beverages, heath and beauty aids, and household cleaners. The growth in film label applications continues to negatively impact prime label paper sales as applications either transition from paper to film, or now start out on film materials. According to Dan O'Bryant, vice president/general manager of Fasson Roll North America's Product Identification division, prime label paper products' unit growth has been slightly positive, but price deflation has resulted in negative sales dollar growth.

Variable information. Rising information needs are driving 10 percent to 12 percent growth for variable information products, states Dean Scarborough, group vice president, Fasson Roll Worldwide. Printer sales, a key indicator of material sales, were up 15 percent in 1999. Thermal transfer products are enjoying 10 percent to 12 percent growth but are also under tremendous price pressure as competition increases, and more value-added is supplied through the printer at the end-user site. One emerging growth opportunity is labels for ink jet printers.

Smart labels. Technically sophisticated labels that provide functionality beyond human readable graphics, such as Electronic Article Surveillance (EAS), is one market attracting the attention of converters focused on security niches.

Which technologies look most promising?

Linerless labels. Though more of a novelty than a technology capturing any significant market share, the potential this technology has for changing the rules of the game makes it worth monitoring.

Digital printing. This small-niche technology currently appears best suited for short-run markets. Continued improvements in ink/substrate compatibility and lower costs are the most frequently mentioned factors restricting digital's growth.

Laser diecutting. An interesting curiosity that hasn't yet seen any significant commercial use, laser diecutting adoption has been held back by difficulty using it in industrial environments, along with higher costs and slower speeds.

The Internet. Electronic commerce has driven variable information label growth, but has eroded express mail label sales as e-mail continues to expand. Base material suppliers and converters are most often using the Internet to provide product information, quotes, and specifications. A smaller number take orders online, and even fewer use it to personalize customer information.

Which trends will impact growth and profitability most?

Overcapacity. Competition at the base material supplier and converter level continues to be intense. Nick Calvetti, president of Amherst Label, believes there is excess capacity at the converter level. Because buyers have many choices, getting new business requires doing something the competition cannot do. Scarborough indicates excess capacity also exists at the base material supplier level, with at least four suppliers either recently adding, or planning to add, coating capacity, including the announcement that Raflatac will be building a U.S. plant.

Profits push. Price pressure continues as mergers and acquisitions increase the buying power of the new giants. As a result, maintaining or restoring acceptable levels of profitability is the number one issue for many companies. Scarborough believes productivity improvements of 10 percent per year are necessary to maintain an acceptable level of profitability, and does not see any decrease in the pressure to maintain this level of improvement. Zaccone echoes Scarborough's call for cost control, adding customers expect printers to know their business well enough to find ways to reduce costs.

Higher material costs. Inflation in raw material costs is rearing its ugly head again. A recent Pulp & Paper Week report stated benchmark northern bleached softwood kraft pulp prices rose $30/metric ton January 1, lifting average levels about 5 percent to $640/metric ton in the United States. North American/Scandinavian paper-grade market pulp inventories fell 54,000 metric tons in December, a move likely to spur another round of price increase announcements.

Raw film material prices are also on the rise. According to Dru Kafalos of Mobil Chemical Co., Films Division, increases over the past six months are due to some of the same dynamics that are pushing gasoline prices up.

Branding. Major consumer product companies are turning to brand image as a way of stimulating sales growth. The wine label market, for example, is going through significant repositioning of existing brands and introduction of new brands targeted to the younger, upscale consumer. The broad capabilities and favorable medium- to short-run economics of pressure-sensitive labels, particularly films, carry wide appeal.

Globalization. As companies increasingly adopt a global look for their products, one label is often produced locally and total purchase volumes fragmented between label producers in different countries. The versatility of pressure-sensitive labeling combined with medium- to small-volume economics makes it a popular global production solution.

Specialization. Custom engineered labels continue to grow at a faster-than-market rate. For base material suppliers and converters positioned to effectively handle this type of business, higher growth rates and profits are available.

About the Author: David Kucsma is a former Avery Dennison executive with over 22 years of experience in strategic marketing, new market development, new product development and commercialization, developing strategic business alliances, and general management. As owner of Match Point Marketing Consultants, Kucsma brings a wide range of experiences to companies seeking specific growth and marketing improvement goals. Contact Kucsma at (440) 352-4553.

Pressure-Sensitive's Three-year Plan:

• Annual growth of 5 percent to 7 percent will continue.

• Downward price pressure will require improvements in productivity to protect profitability.

• Technological innovations will drive 10 percent to 12 percent growth in film products.

• Excess capacity at base material supplier and converter levels will continue.

• The information explosion will fuel 8 percent to 10 percent growth in thermal transfer and ink jet laser labels.

• Raw material inflation will continue.

• Increased emphasis on brand image will increase pressure sensitive labeling use.

• Custom engineered solutions will grow 10 percent to 15 percent, providing above-average profit opportunities.