Tough Times

What goes up, must come down—so the saying goes. This could be used to describe the business climate during 2008 in any number of ways. In one way, both the going up and the coming down had significant negative effects. Corey Reardon, president and CEO of AWA Alexander Watson Associates, noted that the first half of 2008 was clearly identified with steadily increasing raw material prices, driven by unprecedented increases in oil and energy costs, with record high oil prices by mid-2008. "During the second half of 2008, the reverse was true," he says. "Oil prices fell, and raw material prices stabilized and began to fall. Also, and most significantly, during the second half of 2008 the impact of the economic crisis affected market growth dramatically. A softening and almost static third quarter was succeeded by rapid and unprecedented declines in market demand in Q4, and into 2009."

Frank Gerace, president and CEO of Multi-Color Corp., had a similar observation. "Market conditions were stable through the third quarter of 2008; however, there was significant demand erosion during the fourth quarter as concern about the economic downturn led to customers ordering less to lower their inventories," he observed.

The packaging market has been described over the years as being recession-proof. This current recession is testing that theory in a big way. (And, yes, it's OK to use the 'R' word now. It's the 'D' words we are trying to avoid now—depression and deflation.)

James Hammer, president and CEO of Hammer Packaging, says it clearly. "There is no industry that is recession-proof. Some are impacted less than others, but all industries suffer when reinvestment slows or stops altogether." While he believes the label market has remained relatively stable, "the competitive nature of the industry has become more intense than prior to the present economic situation," he says.

Gross domestic product (GDP) is often used as a reference point for making predictions for the packaging market. Looking at recent GDP data would substantiate the potential negative impact on the label market. According to estimates from the U.S. Department of Commerce, GDP fell at an annualized rate of 6.1 percent in 1Q09.

With quarterly numbers such as this, it stands to reason that the label market is being impacted to an extent. "Labels have not been immune from the worldwide recession, and packaging certainly isn't recession-proof," says John Zarwan, an independent consultant for the printing and packaging industries. "While packaging and packaging printing hasn't been hit as hard as many other industries, there is no doubt that it has declined."

In response to the recession and because of the significant loss of jobs, Zarwan says that consumers have pulled back and changed buying habits. "These changes affect different label converters differently, depending on end use, product category, customers, and type of label," he says.

Gerace points to some of the changes in consumer buying habits that he has observed. "We have seen the most demand erosion in premium beverages and home improvement markets. However, virtually all the markets we support have had some contraction. The private label and lower tier products have definitely faired better," he says.

Out in time

Important questions on many people's minds are: What is in store? How long, how deep will this recession be and how will it impact the tag and label industry?

AWA recently released a report, "Labeling & Product Decoration Markets, Global Review 2009," in which it analyzed these markets. In this study, AWA says that the world label market, although reflecting the severe downturn in the world markets, fared better than other business sectors. According to the report, overall growth for labeling worldwide was 2.1 percent in 2008. However, this was down from more than 5 percent in previous years. For 2009, Reardon sees a further downward shift for North American markets. "Demand is expected to be softer in 2009 with a decline in North America at minus 2 percent or more," he states.

Although 2009 is shaping up to be a very difficult year, there is hope that it will at least see the bottoming out of the severe economic downturn. "I think the economy will stabilize in the fourth quarter of this year and we will experience very low growth levels for the following two years," says Gerace. "The Economic Stimulus package will help to improve the economy in the short term; however, I fear we will enter a period of 'stagflation' as a result of the inflationary impact of pumping trillions of dollars into the economy and the measures that will then have to be put in place to counter it."

Hammer also believes the economic stimulus will lead to much higher inflation in the future, with resulting higher interest rates hampering some percentage of the market from reinvesting. "This may be bad or good; only time will tell," he says. "One fact is for sure; there will be less packaging printers in the future due to this crisis."

Many industry analysts have predicted for some time that the tag-and-label industry would experience consolidation at all levels. The depth of this recession could make consolidation a more likely occurance in the coming months.

"The recession is a 'deleveraging', a D-process," says Zarwan. "In every industry, weaker hands will fold, for whatever reason. We have already seen this with the very large integrated packaging converters … The tag and label printing industry will be no different from other industries in this regard. Some companies will close, others will be sold to those looking to acquire good assets at a discount."

Opportunities to pursue

For companies that are struggling to survive, or even working to come out of this difficult period stronger, there seem to be a number of areas that present growth opportunities. Gerace, for one, believes that pressure-sensitive applications will continue to be the area with the most opportunity for growth.

Hammer sees other opportunities stemming from new technologies. "Growth within the label market will come from new, innovative ways of product decoration," he predicts. "Present decoration methods will realize growth as the economy improves, but the real growth will come in new technology."

Reardon mentions some market segments that are showing relative strength. "The two main areas least affected by the recession are anything related to consumer food packaging and healthcare fields," he notes. "Although labeling in the food and healthcare segments has seen some softening in demand, they are relatively stronger than other application areas and are stable (food) or showing demand growth (healthcare)."

Two other topics are clearly worthy of note—digital printing and sustainability. Multi-Color is one of a growing number of companies that digitally prints prime labels, mainly for customers that require low order quantities, says Gerace. Over time, he predicts, "There will be a gradual shift to digital printing from other conventional print technologies as wider format and faster digital presses become available."

"It's clear that digital print in packaging—and particularly of labels—is growing, and growing faster than the market overall (even discounting the recession)," says Zarwan. "There is no reason to believe that it will displace one technology more than another. To the extent that flexography dominates packaging, it will be most affected, but it may also make it more difficult for offset to maintain share."

Before the recession hit and put the (screeching) brakes on worldwide growth, sustainability was one of the most talked about trends in many industries, not just printing. It has taken somewhat of a back seat to the recession, but there is no doubt that it is playing a significant role in packaging segments now and will continue in years to come.

"Sustainability is a very large and significant interest for our customers," says Gerace. "We are receiving increasing requests for products that utilize materials that support sustainability, especially from our larger national accounts. I think being sustainability-certified, such as with the TLMI's Project L.I.F.E., will not only set companies apart and provide a competitive advantage, it will someday be a requirement in order to do business with many customers."

In a study titled, "Green Packaging to 2013" released in March, The Freedonia Group reports that green packaging has achieved mainstream status as a "vehicle for cost savings and product differentiation." The study predicts that U.S. demand for green packaging—defined as using recycled content, biodegradable, or reusable packaging—will increase 3.4 percent annually to $43.9 billion in 2013.

Surviving tough times

These are extraordinary economic times in North America and around the world. Very few industries will come through this unscathed. Hammer believes the present economic crisis will impact the label market for years to come. "Consolidation and Chapter 7 filings will reshape our industry," he says. "Those who can adapt change and have a strong balance sheet will survive. Those who can't, will not."

Even in the most difficult situations, opportunity knocks, and today, Zarwan still sees a silver lining. "The current 'Great Recession', while difficult, nevertheless offers an excellent opportunity to remake organizations, enhance productivity, and provide innovative solutions to customers," he says. pP