State of the Industry-Tags and Labels

THE BEST THING that could be said about 2002 is that our economy was in a recovery mode. The ongoing problem is that this recovery is not one that is exuding much business confidence. It seems like everyone is looking over their shoulder waiting for the shoe to drop. There is much uncertainty, what Dr. Joel Prakken, chairman of Macroeconomic Advisors, termed as "event uncertainty" at his presentation at TLMI's Annual Meeting in October. And it appears that this uncertainty won't go away anytime soon.

Prakken pointed out that this recovery will be different from typical recoveries that we've seen in the past, mainly because the recession was also different. The recession was not brought on by inflationary pressures; inflation has been well under control for a long time now. Also, throughout the recession, consumer spending was extraordinarily resilient, including major components such as housing and automobile purchases.

This good news also means that the recovery won't get its typical surge from renewed consumer spending, nor will it get boosts from interest rate drops that stimulate economic resurgence coming off high inflationary periods. As a matter of fact, Prakken says that the current low level of fund rates are unsustainable and he expects fund rates to be increased to what he terms a "neutral" rate of four to five percent throughout 2003.

If 2002 was in a general recovery mode, the weakness of it could be seen by tag and label converters. Art Bowers, VP of sales and marketing for label converter Advanced Web Technologies, saw continued softer demand, coupled with a slight increase in industry capacity. "Basically, what you have is the same number of presses chasing less business."

Bowers remembers an economist saying several years ago that the packaging industry generally leads the rest of the economy by about six months. "If this is true, I'm not sure that a firm turnaround has begun yet," he states.

Less business with no drop in capacity would naturally put some pressure on pricing structures. This is exactly what John Hickey, owner of Smyth Companies and president and founder of Interactive Packaging Group, saw in this past year.

"It was another historically tough year for pricing pressure as our customers—the consumer goods manufacturers—felt their own pressure from the major retailers. The 'baby is being thrown out with the bath water' in many cases with some manufacturers seemed focused less on package innovation and more on price and supply chain reduction."

This issue was mentioned by Christian Simcic, group VP for Avery Dennison Roll Materials, in his Keynote Address at Labelexpo in September. He said that channel consolidation was one of the major challenges facing the industry. What results, said Simcic, is that major retailers such as Wal-Mart and Target put intense pressure on the consumer goods companies, who respond with innovative packaging and decreasing cost structures. This, in turn, requires converters to implement rapid productivity gains and lower costs.

The label converting industry's response to this may be what Hickey says is similar to an inversion in a lake where the cold water is exchanging places with the warm water. "I see the major players racing to add economies-of-scale to be able to compete in the arena where the products end up at the Wal-Mart's of the world, but I see a whole new group of niche players who will identify and focus on niche markets that may bring on new ways of producing labels that we haven't seen yet."

Outlook for labels

The Freedonia Group's recent study, "Labels to 2006", forecasts growth in U.S. label shipments of 4.8 percent per year through 2006, to eight billion square meters valued at $14 billion. The upside comes from technologies such as reduced space and 2D barcoding, plateless digital printing, and advances in label substrates, adhesives, and coatings. Downside pressures will come from maturity in some key label applications and competition from direct labelless printing.

According to the study, paper will continue to be the leading label substrate, but will continue to lose share to plastics. Plastic substrates are used extensively in growing label application methods such as pressure sensitive, in-mold labeling (IML), and shrink sleeves. Paper labels will also be hurt by a trend toward decreasing use of metal cans and glass containers.

Pressure-sensitive labels are projected to maintain their significant position in labeling, accounting for more than two thirds of the total output. Use of pressure-sensitive labels will benefit from applications in expanded content labels in medical and personal care markets, along with gains coming from traditional wet-glue, gummed, and heat-seal applications. On the flip side, competition will come from IML and shrink sleeves/labels.

The Freedonia Group says that flexographic printing will remain as the top label printing method, with above-average gains. These gains will come, in part, from the growth in UV flexo printing and the continuing development of high-quality, environmentally friendly UV inks.

Combination printing will also continue to be a significant factor for label printing, including the addition of gravure stations in flexo presses and digital printing that can be used for variable information. Bill Klein, executive director of the Packaging and Label Gravure Association, believes that this is where digital printing will initially make its mark, as an adjunct to other printing processes.

There is no doubt that digital printing is finally beginning to make inroads in the package printing market. In his paper titled, "Labels and Packaging Papers in 2003: Custom, Color, Digital, and Security," published in GATF World's Technology Forecast '03, Paul Simpson, senior VP of sales for SMART Papers states, "While the installed North American base of digital presses devoted to package printing is relatively low, the segment will be among the strongest areas of growth over the next two years. Here's why: Shorter production runs and greater customization—as well as more test marketing, just-in-time delivery, and increased segmentation to niche markets with variable data—are profoundly impacting consumer goods packaging and production."

Strategies for label printers

With economic times as tough as they are, and looking like they'll pick up speed like a tractor trailer heading up a steep incline, label printers will need to continue knuckling down. Because pricing pressures and other service concessions remain a significant factor, Hickey says that "belt tightening will continue for us." This will likely be common mode of operation throughout the industry.

For those companies that are in a position to assess their current business strategies, Simcic offered some suggestions:

• Focus on your customers' needs.

• Remember the basics—be excellent in printing and delivery, and intensely manage working capital.

• Shift from being a label supplier to becoming a packaging consultant and partner.

Advanced Web Technologies remains focused on the customer side of the equation. "We work hard to understand our customers' businesses and to create and implement value-added services to support them," says Bowers. "Quality is a given, so the value equation is in the services we wrap around our products. This approach helps us to retain our customers, bring on new ones, and minimize price erosion."

Likewise, Hickey says there will be opportunities for his company to play a larger strategic role with certain customers who will use their label suppliers more as a consultant for packaging strategies that will provide lift to their on-shelf products. "The key for us is to find these value-added customers."

-by Tom Polischuk

Editor-in-Chief