Playing it Prudently

Converters put a conservative spin on spending and profits in 2001—but how much caution is too much?

by Susan Friedman, Editor

On the surface, there's plenty of positive flexible packaging news. Consider the 2000 returns reported by some of the larger players in the industry:

Alcoa turned in its best fourth quarter in the company's history, while Alcan sales were down for the quarter but up 34 percent for the year. Bemis netted a 13 percent increase in sales for the year, completing acquisitions of Viskase, and Arrow's flexible packaging business. Sealed Air's Cryovac division reported a 3 percent annual sales gain, and AEP's North American annual sales grew 10.2 percent.

The Flexible Packaging Association (FPA)'s 2001 Outlook Survey bears more uplifting data, reporting shipment values rose 3.6 percent in 2000 to an estimated $19 billion. A further 3.5 percent increase is projected for 2001, which would push values to $19.7 billion. Further, respondents to packagePRINTING's Top Flexible Packaging Converters Survey reported an average annual profit growth rate of 12.5 percent.

Bret Biggers, director of business and economic research at FPA, says the association's members generally experienced smooth sailing through the first half of 2000, but ran into dicier dealings in the second half. The year was host to a flurry of industry restructuring and cost-cutting, which he explains can boost earnings and profits, but not necessarily value of shipments.

In general, converters' responses to FPA's annual survey uncovered surprising undertones of caution and concern. For the first time in the survey's history, opinions were evenly split (40 percent each) on whether 2000 was better or worse than the previous year. Converters cited lower sales/volume and higher material costs as their leading profit nemeses.

But is this segment taking negative economic hype too much to heart? "So much visibility and talk of an economic slowdown creates psychological pressure and heightened sensitivity in the industry," observes Terry Clark, director at consulting firm Crescent Associates. "End-users almost always resist price increases from converters, but now the pushback may be more challenging than usual. Converters will find it hard to pass on not-so-visible cost increases such as those for energy and labor. They may be pressured to hold inventory for customers."

FPA's survey also found just 60 percent of converters (the lowest percentage in the survey's history) plan to purchase machinery in the coming year. "This cooling-off period supports the fact that volume is converters' number one concern," states Biggers. Clark, too, sees converter and end-user commitments to invest in new equipment being postponed at least six months.

Applications A-list

The reality of the flexible packaging market may not merit the degree of caution converters seem to harbor. Biggers emphasizes many business dynamics seen in the past few years are still at work in the industry's favor, including rigid-to-flexible conversions, new product introductions, and stand-up pouch in-roads. The continuing "aging of America" has pushed ahead such applications as single-portion and pharmaceutical/medical/health packages.

A new presence in FPA converter members' top five choices for flexible packaging growth markets, meat/poultry/seafood, reflects recent improvements in barrier films and, ultimately, shelf life for case-ready products—the growth of which has been spurred by the increasing need for single-portion packaging with higher-quality, attention-getting graphics.

Interest in pet food, a new top-five growth market selection in 2000 that made the ranks again this year, reflects strong rigid-to-flexible conversion activity such as the replacement of cans by stand-up pouches. In another historical high, 76 percent of converters logged rigid-to-flexible conversion orders in 2000.

Barry Goldberg, director of consulting firm Tappa Group International, confirms the continued strength of stand-up pouches, particularly for cat food. He also emphasizes the potential of the retort pouch (a heat- sterilizable flexible package) for tuna fish, which is more expensive than the canned product, but improves quality by reducing retort cooking time and reducing the amount of water or oil used.

The full-body shrink-sleeve label, a technology that could be classified as a hybrid label-flexible package, has found a strong niche on contoured bottles, Goldberg notes. "The shrink-sleeve gives marketers a lot more options than a straight-sided label and significantly enhances package graphics on the shelf," he comments. In addition, aerosol cans and coffee cans formerly composed of offset-printed metal now frequently sport wrap-around plastic sleeves—a development Goldberg believes provides significant cost advantages to companies with varied product lines, and reduces inventory costs.

Materials management

According to FPA's survey, "stable" is still an apt descriptor for converters' materials usage trends, with the exception of a large dip in the number of converters using cellophane in 2000. Converter usage of paper use remains steady at 50 percent, while foil use has maintained 60 percent levels, and plastic has held onto 100 percent usage.

According to Bob Poirier, president of Crescent Associates, increased activity among off-shore manufacturers seeking to break into U.S. markets includes introducing nontraditional flexible packaging materials, such as cast polypropylene (CPP), onto the local scene, as well as higher-margin materials.

As suppliers search for new profits comfort zones, converters should expect to pay a bit more for most plastic materials this year. Although oil barrel prices appear to be stable now, Clark cautions "the impact of their recent, sudden increase is going to have to make its way downstream through resin and film producers to converters and end-users."

Polyethylene resin has already seen a price increase this year, and a polypropylene increase is anticipated, Clark continues. Oriented polypropylene (OPP) film manufacturers attempted increases last year which didn't hold well. Polyester is still a great bargain. "Most of these manufacturers are in pain, so if increases don't stick soon, someone may exit from the business," she concludes.

Less urge to merge?

Overall, 2000 merger activity in the flexible packaging arena was significantly down compared to recent years. Large transactions, such as the Alcoa-Reynolds and the Alcan-Algroup mergers, reflected more of a change of ownership than a melding of flexible packaging operations, Biggers notes.

This slowdown could easily shift back into high gear, however. If narrowing profit margins persist well into the coming year, maintains Clark, small- to medium-sized companies who have had enough of dealing with the squeeze may get a good deal in a buy-out by a larger player.

Just 40 percent of FPA converter members currently plan to pursue expansion via a merger, new plant, or existing plant upgrade in 2001—a historical low. Of these, 50 percent intend to explore a domestic merger strategy, and 70 percent expect to build or upgrade a domestic plant.

One thing is certain—converters can't depend on a cookie-cutter strategy to ensure success in 2001. "The market is tight and very competitive," sums up Poirier. "Innovative converters are going to come out ahead."

"The typical, but many times short-sighted reactions of cutting costs, staff, and R&D may not be the best approaches," adds Clark. Some companies will profit from creatively investing in new technology, customer-focused services, or productivity improvements."

For more information...

Crescent Associates, Fairport, NY, (716) 425-3162, www.crescentassociates.com.

Plastic film, flexible packaging, and labels development.

Flexible Packaging Association (410) 694-0800

Tappa Group International, Northbrook, IL, (847) 272-2555, tappa2@aol.com.

International marketing consulting firm providing market and technology analysis in the packaging industry.