A Long and Winding Road

Times are tough; there’s no doubt about it. Costs are rising, competition is fierce, and the economy is in a tail spin (or nose dive, depending on your perspective) but heading down just the same.

“This was a difficult year for the [tag and label] business due not only to macro economic issues including high energy costs and continuing high raw material inflation, but also because of growing competition to labels and tags in the packaging industry itself,” notes Corey Reardon, president and CEO of AWA Alexander Watson Associates.

The rising costs of materials—across the board—are at the top of most printers’ lists of issues. A majority of tag and label printers are relatively small businesses that can get caught in the supply chain pricing squeeze between large suppliers and, sometimes, even larger customers. It’s a tough place to be.

Reardon sees little relief in sight. “There is no sign of a softening in oil and raw materials inflation, so margins will be squeezed at all levels of the value chain,” he says. This is true in the prime label market particularly, where brand owners (themselves suffering from spiraling oil-associated costs, etc.) are aware of supply-side pressures, but need to mitigate necessary increases. Suppliers are doing their best to find cost-cutting solutions.”

It’s all relative

Even with the tough economic times, the tag and label printing and converting industry is in a better position to weather the storm than many other industries. As a matter of fact, Reardon reports that the overall global market for labels grew 4 to 4.5 percent in 2007.

“In the medium-term, there are real opportunities for growing the overall market for tags and labels as the developing geographical economies around the globe stabilize, and western-style consumerism becomes established,” he predicts. In this assessment, Reardon singles out what are referred to as the BRIC countries—Brazil, Russia, India, and China.

At the same time, he offers a word of caution. “We must not think that growth in these geographies will impact North American and European printers,” he says. “Local capability—in both label and tag raw materials and printing—is growing fast.”

For the U.S. market, The Freedonia Group predicts relatively healthy growth in label shipments over the next few years. In its recent study, “Labels to 2011,” Freedonia forecasts the market to increase 5.1 percent annually, reaching $18.3 billion in 2011. Although pressure-sensitive labels will still account for the majority of label shipments, this category is seeing some erosion from other label application methods such as stretch and shrink sleeves. According to the study, the stretch/heat-shrink sleeve category will grow at a 7.7 percent annual clip through 2011 and will be driven, in part, by its inroads into the large beverage market.

Freedonia also points to the continued growth in the use of plastic substrates. Although paper will continue to have the lion’s share of the label industry, it will continue to lose market share to plastic materials. “Advances will be based on the aesthetic and performance advantages of plastic labels; the growing use of plastic packaging; and the popularity of labeling methods such as pressure-sensitive, in-mold, thermal transfer, and shrink, which heavily rely on plastic substrates,” according to the report.

Dave McDowell, president of McDowell Label & Screen Printing, also believes that some areas of the overall marketplace are less susceptible to the current economic unrest and that the tag and label industry is one of them. “Overall, we see continued growth in the next five years,” he says.

Challenges/Opportunities

Even with the optimism that these growth assessments project, challenges abound for the tag and label printer. Mike Fairley, director of strategic development for the Labelexpo Global Series, enumerated some of the issues in his report, “Global Market and Technology Challenges.”

“There are, of course, challenges for the label and flexible packaging industries such as profitability, environment and sustainability, ever more globalization,” he notes. “There are all kinds of concerns and worries to be resolved and certainly, there are some regions of the world that are in something of a slowdown, or even achieving little or no growth at all, but overall the global label and unsupported film converting sectors look to be in a relatively healthy state.”

The growing focus on sustainability will put renewed emphasis on the “Achilles’ heel” of pressure-sensitive labeling—the material waste stemming from the release liner used in the majority of applications. However, Reardon believes the industry will react in a meaningful way to mitigate the environmental impact.

“The key issue in the tag and label market in terms of sustainability is the pressure-sensitive label and its associated matrix and release liner waste,” he acknowledges. “Nevertheless, as recycling (in all its forms) plants become a part of the scene, as pressure-sensitive laminators provide lower-gauge face­stocks (primarily films), and as release liner manufacturers down-gauge their base stocks, managing the waste stream responsibly will give pressure-sensitive labels a new lease on life.”

While sustainability presents its share of challenges, it also provides an avenue for printers to take a somewhat proactive approach to environmental concerns with the use of bio-based films. Although this approach is not going to be the end-all answer to sustainability, it will have an ongoing impact in the label market over time and it currently presents an opportunity for making a distinctive sustainability statement.

“As the environmental lobby becomes increasingly strong, bio-films will take a greater share of the label market to partner recyclable/compostable containers made from similar polymers,” predicts Reardon. Like any other new development, time is needed to fully commercialize the product. “There is still some work to do to optimize their print characteristics and applied performance, however, so this will take time,” he notes.

With sustainability concerns providing both challenges and opportunities over a changing landscape, McDowell simplifies the potential impact on tag and label printers. “Sustainability will be positive for those who respond [to it] and negative to those who don’t.”

Another area providing a clear challenge to the tag and label category (while also providing an opportunity for printers in the business of product decoration) is flexible packaging. “Flexible packaging—direct-printed so there is no need for an additional ‘label’ on the pack—is an obvious major competitor,” says Reardon. “Pouches and sachets will unquestionably and increasingly take business from traditional tags and labels, and converters in these areas should be looking to take a share in this new market for package printing.”

The challenge from flexible packaging comes not only from the “loss” of a label on the package, but also from the door that opens up to other competitors. “Interestingly, it is frequently flexible packaging producers that have also turned to some of the newer label technologies, particularly sleeving and wrap-around film labels—another example of the overlap between labels and flexibles,” notes Fairley in his report.

This overlap works both ways, however, and Fairley points to the growing use of filmic substrates in label converting as an impetus to getting into flexible packaging. “[It is] little wonder then that label converters start to look at the short-run and added-value niche markets of flexible packaging,” he says.

As a matter of fact, according to the Labelexpo Global Group’s annual global label industry surveys, many ­label converters worldwide now produce flexible packaging. Data from these surveys indicate that more than 26 percent of North American label converters also produce flexible packaging. In Europe and India, this number is more than 30 percent, while Latin America comes in at more than 50 percent.

Digital printing is another area that is continuing to make its mark in the tag and label industry. “Digital label printing is also on the increase in most label markets, with North America and Europe leading the way,” notes Fairley.

Reardon agrees with this assessment. “After a very slow start in the label and tag business, reel-to-reel digital print is beginning to take market share, even in medium-length print runs, thanks to improved run speeds and print quality and the ease and speed of prepress,” he says.

Kevin Karstedt, president of packaging consultant Karstedt Associates, is even more optimistic in his predictions for digital printing. He believes that—especially coming out of drupa—as much as 10 to 15 percent of labels (the entire label) will be printed from digital presses in the next several years.

Strategies

The tag and label industry is by far the most highly fragmented sector in the North American package-printing arena. In its study, Freedonia gives a range of between 3,000 and 5,000 companies that are actively involved as label stock suppliers or as label printers and converters. This will undoubtedly be reduced during the next several years.

“In the tag and label business in North America and Europe, there is room for much more consolidation at the converter level,” observes Reardon. “Increasing globalization and the need to leverage economies of scale mean that ‘mom-and-pop’ businesses can only survive in a limited local supply context or as special market niche players. I am sure 2008 will see further consolidation in the converter ranks.”

He believes there are two basic options for tag-and-label printers—consolidate or specialize. “To stay small and provide a personal ‘local’ service, or to stay small and specialize in a particular expert market niche, is an option for a successful future. To consolidate by establishing a physical presence in new geographies, either by investment or acquisition, is another possible route to success.”

Staying in the middle and uncommitted to a direction in which to take a company is not a path that will lead to success. “In this very competitive market, there is really no place for the medium-sized enterprise with no physical growth strategy, and no specialist capability,” warns Reardon.

Proactive collaboration

The tag and label industry supply chain is facing challenges at all levels that are not going to go away. Because of this, says Reardon, “It’s more important than ever for the many steps in the supply chain to talk openly with each other, and to interact, sharing innovation and working together to keep presenting end users with tag-and-label products that will delight them—and that they can afford.” pP