Advantage: Flexible Packaging

Cautious optimism appears to be the general consensus in many market segments these days. Even though the U.S. and world economies appear to be in the initial stages of recovery, many indications point to a sluggish recovery at best, with many bumps in the road and dangerous hairpin turns to negotiate.

During the past year, the flexible packaging segment suffered through the downturn just like other industries. At the Flexible Packaging Association's (FPA, www.flexpack.org) annual meeting held last month, John Baumann, president and CEO of Ampac Packaging LLC (www.ampaconline.com) and chairman of FPA, presented preliminary data from the association's State of the Industry report that will be issued mid-year.

Baumann reported total sales for U.S. flexible packaging of $25.7 billion in 2009, down from $26.2 billion in 2008. Of this, value-added flexible packaging—which involves multiple processes, usually including extrusion, laminating, and printing—decreased about 1.5 percent in 2009 to $20.0 billion. In addition, preliminary results from FPA's converter member survey indicated that 69 percent of participants had lower revenues in 2009 versus 2008. Relative to capital expenditures, 57 percent reduced their investment levels in 2009, while a respectable 29 percent were able to increase capital spending. As another relatively positive indicator, capacity utilization was up slightly in 2009 with 43 percent of participants running at greater than 80 percent.

Going forward, the State of the Industry report forecasts slow growth in the near term, with gradual improvement of 2 to 4 percent per year. It also predicts that the industry will experience further consolidation, along with challenges coming from raw material cost volatility and margin pressure.

Although this Great Recession has proven that the packaging segment isn't quite recession-proof, packaging in general, and flexible packaging in particular, do have distinct advantages versus commercial printing because of the markets they serve. For example, the largest category for flexible packaging sales is food (one of the more non-discretionary consumer categories), with the FPA reporting 56 percent of 2009 sales going for food products.

One snapshot of how the downturn has impacted companies that supply flexible packaging in consumer markets can be seen with a look at Bemis Company (www.bemis.com). In its annual report for 2009, it reported its net sales decreased 7.0 percent overall from 2008. While net sales for its flexible packaging business (which accounts for 85 percent of the company's total sales) decreased about 5.4 percent, its operating profit for this business increased from 10 percent of net sales in 2008 to 12.9 percent in 2009. Henry J. Theisen, president and CEO reports: "Our flexible packaging business achieved record operating profit in 2009 driven by lower raw materials costs early in the year, followed by stronger sales of value-added products and manufacturing improvements."

Consolidation

There is a general consensus that the U.S. flexible packaging industry will continue a steady march toward consolidation. In his review of FPA's State of the Industry report, Baumann noted that there are currently about 414 flexible packaging companies in the U.S. As one indication of the industry consolidation, the revenue share of larger companies (those reporting annual revenues greater than $500 million) has risen from 30 percent of total industry revenues in 1996 to 52 percent in 2009, according to data compiled by FPA.

Tom Blaige of Thomas Blaige & Company (www.blaige.com) says there is every reason to believe that "flexible packaging is due for significant consolidation." In his presentation at FPA's annual meeting, he noted the impact of industry consolidation during the past decade. Of the top 50 flexible packaging companies in 2000, 32 percent have lost their identity, 12 percent have changed ownership, and 40 percent have used M&A to achieve strategic goals, he reports. He also compared the evolution of other, more mature packaging types to make a case for further consolidation. For glass packaging containers, three companies currently control 90 percent of the market, and for metal cans, four companies have 80 percent share. This compares to 34 percent share for four companies in flexible packaging in 2010.

Market opportunities

As a packaging segment, flexible packaging offers a number of advantages. These include material source reduction benefits that appeal to sustainability efforts and continued distinctiveness on store shelves. In its "U.S. Converted Flexible Packaging to 2013" study, The Freedonia Group (www.freedoniagroup.com) predicts demand for converted flexible packaging to increase 3.4 percent per year to a level of $18 billion in 2013. According to the study, "Converted flexible packaging's source reduction capabilities will be increasingly important in light of initiatives by major retailers such as Wal-Mart to evaluate the packaging used by their suppliers in terms of environmental friendliness and cost reduction."

One of the fastest growing categories in flexible packaging continues to be pouches, in all variations. The Freedonia Group predicts that demand for pouches will increase 4.7 percent per year to $7.9 billion in 2010, which actually reflects a decreased rate from the period of 2003 to 2008. This is due, in part, to a larger established presence in a number of markets.

Food is the single largest market for flexible packaging, and in a separate study, "Food Containers to 2013: Rigid and Flexible," The Freedonia Group projects pouch use to increase 4.2 percent yearly to $5.6 billion in 2013. According to the study, healthy gains will continue for flat pouches in markets such as produce, frozen specialties, meat and related products, soups and canned specialties, and sauces and condiments. Although the use of pouches has become fairly common in many packaging applications, "[pouches] remain distinctive in appearance, and demand will benefit from continuing efforts by firms to differentiate their products with packaging that stands out," says Freedonia.

Sustainable future

Sustainability remains an area of ongoing focus. Although it took a back seat in recent months as companies focused on managing their businesses through the recession, it will again come to the forefront as the economy ramps up.

The importance of sustainability to the flexible packaging industry is illustrated by the FPA's proactive introduction of the "Sustainability Advantages of Flexible Packaging Education Toolkit." It has several components including a Resource Guide, a Case Story brochure, and a Fast Facts brochure, which compare such things as energy consumption, emissions, weight, waste, and product-to-package ratio of flexible packaging and other packaging options. The Toolkit is designed as an educational resource that FPA members and the flexible packaging industry as a whole can use to understand the sustainable benefits offered by flexible packaging.

The use of bio-plastic films is one area that will garner a lot of attention during the next few years. In its Market Intelligence Guide for Packaging, Pira International (www.pira-international.com) listed the use of natural polymers in packaging as the number-one disruptive technology in terms of both acceptance and impact. Further, in a study titled, "The Future of Specialty Films," Pira reports that "biodegradable, water-soluble, and food contact versions of specialty films have been performing well despite the current economic climate, with their projected sales growth expected to be 13, 9.8, and 8.3 percent, respectively, in the forecast 2009-14 period."

A stacked deck

As long as the economic recovery maintains a steady course through the rocky road ahead, flexible packaging should experience positive growth. The industry is playing in the game with a good hand. Its "aces" include advantages in sustainability and shelf appeal—not a bad hand to be dealt. pP