Changing Environment

The tag and label industry continues on a steady path of change. It wasn’t too long ago that primary product labeling meant one of two decoration formats—pressure-sensitive or glue-applied paper labels. But with major inroads being made by film materials and competition from other product decoration methods, tag and label printers find themselves dealing with a multitude of challenges and opportunities.

Corey Reardon, president and CEO of AWA Alexander Watson Associates, acknowledges the changing landscape of the tag and label industry. “Product decoration and identification has become a much broader platform in recent years, with the two macro technologies—pressure-sensitive and wet glue labels—now competing actively with a variety of sleeving technologies, with in-mold labeling, and, most significantly, with direct print onto unsupported film and paper webs, i.e., flexible packaging.”

AWA was the architect of the just-released Tag and Label Manufacturers Institute (TLMI) 2007 North American Label Study (NALS). AWA’s research for this extensive study showed a still-hefty 46 percent North American market share for pressure-sensitive labels, along with 44 percent for cold glue, wrap-around cut-and-stack, and wrap-around reel-fed labels. Growth for pressure-sensitive labels in the NAFTA region is predicted to be 1.5 to 2.0 percent annually during the 2006 through 2010 time frame.

Although this growth rate is a far cry from the “good old days,” the expanding scope of product decoration is not necessarily a detriment to the label printer, says Reardon. “Today’s high-tech, narrow-web presses—particularly combination presses—enable printers traditionally specializing in pressure-sensitive labels to offer their customers packaging print for many of these alternative technologies, in addition to their core label printing capability.”

Along these same lines, John Hickey, chairman of the TLMI Board of Directors and owner of Smyth Companies, Inc., believes the future is being written by what is taking place today. “You just need to look at our well-funded, innovative suppliers for presses and substrates who continue to spend R&D dollars on servo technologies, platform presses, thinner films, etc. to see where the future is going.”

Many label printers are currently positioning themselves for these realities. According to the NALS, 38 percent of TLMI converters are currently producing packaging other than labels, particularly unsupported flexible packaging films and laminates. They are taking advantage of the multi-substrate capabilities of the state-of-the-art presses to provide their customers a broader range of product offerings.

Challenging economics

The North American tag and label printing industry is characterized by a large number of relatively small, privately owned companies that can easily be caught in a supply chain pricing squeeze. Reardon believes that label printers will continue to be pressured from both sides of their value chain, which in many cases can be suppliers or customers that have scale advantages well beyond those of the printers.

“Suppliers of substrates are experiencing raw material price increases that they need to pass on to their converters,” says Reardon. “End users—the brand manufacturers and major retail chains—continue to drive purchasing and are seeking to maintain, if not reduce, current prices for labels. As globalization continues at the end-user level, there is little hope that this situation will change in the medium term.”

Hickey believes that the label market mimics that of its customers. For the general primary label market in 2006, “this meant more consolidation, price pressure, and more attempts to commoditize the industry. This pushes more and more converters to either specialize or gin up the capital to capture the very large ‘commodity’ label markets.”

All this stems from pricing pressure and the need to cut costs. “Pricing pressure certainly remains at the forefront,” notes Hickey. “The new production equipment needed to reduce production costs is not inexpensive, so many converters will have to spend money to save money. That gamble weighs heavy on converter’s minds, especially in light of customers not being as predictably loyal as years ago.”

With the tag and label industry so fragmented, consolidation is a virtual certainty. According to Reardon, “Consolidation through merger and acquisition or through strategic partnerships with other converting companies will be the key to survival for medium to large enterprises. Developing a presence in international, and even global markets, becomes a priority to meet the demands of the global end users.”

However, he believes that small, regionally-focused printers, or specialist converting companies, such as those in pharmaceuticals or wine labeling, will continue to prosper by meeting the needs of these specific markets.

Hickey notes an industry trend in which equity-backed converters are “competing to roll up segments of the industry.” This, he believes will play itself out, but not before some impact within the industry. “Not everyone can win this race, so there may be some collateral damage to converters competing against these ‘conglomerates’ and fall-out for those conglomerates that are not as successful in this new game.”

One challenge that seems to be getting more and more notice throughout the tag-and-label industry and beyond is that of environmental concerns. “Long term, environmental issues will challenge this industry as environmental consequences begin to dictate real costs,” observes Hickey. “Energy, cost of oil, and sustainable packaging are becoming more than just political commentaries. Rather they are at the forefront of power in Washington as literal wars are being fought over the consequences of mismanaging natural resources. ... I think many will be surprised at how quickly this will trickle down to our little place in the industry’s food chain.”

Opportunities

For those converters that are able to make the investment in highly flexible new press technology (and the TLMI NALS study indicates that a good number of converters are planning on making such investments), the options to branch out in any number of segments will be readily available.

Says Hickey, “Depending on the converters appetite for adventure, the new presses we are buying can print virtually anything on a roll, leaving the finishing and the market penetration as the issue. As long as one is playing in the middle markets, many converters have gravitated to flexible packaging, cartons, shrink, and IML. The bet you are making is the ability to compete on the cost of the substrate side along with your ability to convince new customers you are a ‘player.’ The bigger converters address these opportunities in a market-driven way, whereas smaller converters try to sell their best customers on a chance to supply something other than labels.”

Specific label markets that are identified as good growth opportunities include beverage and pharmaceuticals. “Globally, beverage markets are the most dynamic areas of opportunity for flexible packaging and for tags and labels,” says Reardon. “Many drinks are sold—particularly to younger audiences—for their fashion credentials, and their packaging is often the only differentiator on the retail shelf.”

The use of clear pressure-sensitive film labels on premium beers is one dynamic growth segment noted in the TLMI NALS. It also highlighted other ‘trendy’ areas of growing use for pressure-sensitive labels. As noted in the study, “There has also been a positive transition from cold glue-applied labels to pressure sensitive in the domestic wine market. This extremely fashion-conscious market also favors the use of pressure-sensitive labels in the lower-cost soft drinks sector (particularly for bottled waters), where the outstanding capabilities of combination narrow-web presses can deliver the end-users’ desired visual appeal.”

In the TLMI study, pharmaceuticals is highlighted as a relatively small segment for pressure-sensitive labels, but one in which pressure sensitive dominates and remains highly profitable. However, it points out that this is a “highly specialized segment, with stringent supplier and material approval processes.”

General trends identified in the study that will benefit pressure-sensitive prime labels include the increasing number of new product introductions, growth in own-label products, and requirements for more product information. Also, although paper substrates still command 70 percent of prime labeling, the major growth will clearly be in film materials.

Technology and innovation

As far as developing technologies that will impact the tag and label segment, Kevin Karstedt of Karstedt Associates, believes “there are a number of technologies that some innovators and forward-thinking converters in all segments will latch onto in the next five years.” These include digital printing, brand security, RFID, and printed electronics.

Karstedt breaks the digital printing segment into two arenas: high-speed industrial and micro-run digital label production. In the high-speed industrial he notes the successes of HP and Xeikon in establishing a presence over the past decade, along with the advances in full-color, single-pass inkjet printing systems from the likes of Agfa, Sun Chemical, and efi Jetrion. In the micro category, Karstedt mentions systems from VIP Color Technologies and Degrava Systems, which he says are based on existing desktop technologies that have been adapted to micro-run digital label production. Karstedt believes that “digital printing will undoubtedly gain acceptance and market share in all segments over the next five years.” The successful implementation for converters will depend on two key issues, he says. These are:

• Choosing the right business model, one in which digital printing is viewed by customers as a value-added offering;

• Choosing the right single-pass technology—Karstedt sees clear application needs and business models to support each of these systems, with the key being to understand the advantages and drawbacks of each so that the best system is selected.

Brand security will be an area of focus for many years to come. “As brand security continues to be a key end-user concern, we will see an increase in the use of product authentication mechanisms within packaging and labeling materials,” says Reardon. “Converters will also contribute via taggants, holograms, etc., applied to packaging during the printing/converting process.”

Karstedt quotes data that indicates global counterfeiting accounts for 6 to 10 percent of the entire world trade value. “The more this problem is understood the larger it has become and the more companies have become involved in developing strategies and tactics designed at controlling the spread of counterfeiting and its impact on companies of all sizes,” he says.

Because of the financial scale, along with real safety concerns, Karstedt believes there will be higher levels of brand protection in the offing. “While many packaging converters are providing their customers with basic brand security products such as holograms and tamper evident seals, the need for increased offerings is evident,” he says. “Today there is an estimated 50 percent of converters that offer some level of brand security capability to their customers; of that total only 5 percent offer a high level of assistance to their customers. This high level of assistance includes consulting services, R&D, and technical services and assistance in developing and managing an ongoing strategic security plan.”

RFID seems to be a promise in the making, but it’s a big question as to when the promise will come to pass. Hickey, most likely representing a view held by many converters in the business, believes in the adage “the emperor has no clothes.”

“RFID tags for consumer goods companies are a long way off and the infrastructure, as it stands now, is immature and still evolving at a steep rate,” observes Hickey. “It is a market gamble most of us are not willing to take.”

Reardon shares this assess, at least for the time being. “As a converting process, in the short term, RFID will not be a commercially viable opportunity for mainstream package printers. But in the medium to long term, developments in conductive and electronic inks will certainly bring opportunities in a major segment outside logistical track-and-trace applications: brand authentication and security. This is definitely an area where converters can genuinely add value.”

In its study titled, “RFID Forecasts, Players & Opportunities 2007-2017,” IDTechEx reports that of the 3.752 billion RFID tags were sold in the last 60 years, with 19 percent sold in 2005 and 26 percent in 2006, clearly showing a solid increase. However, IDTechEx does acknowledge that the 1.02 billion RFID tags sold in 2006 was “disappointing to those expecting higher volume sales of versions in the form of labels.”

Successes noted in the report include airline baggage and some segments of the retail sector. Airlines in 2006 used 25 million tags, despite experiencing problems with the UHF global standard for baggage. In retail, U.K.-based Marks & Spencer is extending its item-level RFID tagging program from 42 to 120 stores by 2Q07. Its goal is to tag all of its 350 million items of apparel yearly. In stores that have implemented the program to date, the company has seen sales increases due to the enhanced visibility of stock availability.

In 2007, IDTechEx expects 1.71 billion RFID tags to be sold worldwide, with the largest segment being RFID cards. The value of non-card RFID tags (e.g., labels, tickets) in 2007 is predicted to be $1.97 with 58.4 percent of this being in the U.S. and 33 percent in Europe. Out in time, IDTechEx expects a $27.88 billion worldwide market in 2017, including new market items such as Real Time Locating Systems (RTLS) using active RFID tags.

Beyond RFID, Karstedt believes that advances in printed electronics for other applications such as printed circuitry and organic semiconductors hold opportunities for conventional package printers and converters. “Developments in the production and use of organic light-emitting diodes (OLEDs) and electronic paper-like displays (aka, electronic paper or e-paper), while still a few years out, hold great promise for new revenue streams for companies that have core competencies in coatings, high-quality printing and R&D. … Package printers and converters who are able to leverage key relationships, advancing technical capabilities, and strong R&D in these areas will be in a strong position regarding printed electronics in the next decade,” he predicts. pP

Resources

AWA www.awa-bv.com
IDTechEx www.idtechex.com
Karstedt Associates http://karstedt.com
Smyth Companies www.smythco.com
TLMI www.tlmi.com