Targeting Success

The folding carton market is facing a stiff challenge from alternative packaging and foreign competition, but the

industry is gearing up for the challenge.

by Tom Polischuk, Editor-in-Chief

IF THE VIEW of Ben Markens, president of the consulting firm Converter's Resource, is correct, the folding carton industry has a big target on its back. It seems as though a couple "great whites" are trying to gobble up chunks of the folding carton volume pie, and for the short-term are doing a pretty good job of it.

The hungry sharks in question come in the form of stand-up pouches and overseas manufacturing. "Competition from alternate packaging and offshore sourcing of packaged products will remain key concerns for U.S. converters going forward," states Jerry Van de Water, president of the Paperboard Packaging Council (PPC).

The industry is fighting back, and in the long run, the battles could have overall positive results for the industry. The American Forest & Paper Association (AF&PA), an organization with a broad focus on the forest, paper, and wood products industry, is lobbying hard for governmental corrective reforms on several fronts. In a statement issued in response to the Bush Administration's January initiative to bolster the U.S. manufacturing sector, the organization highlighted several areas for reform.

"Economic pressures caused by unfair global competition are harming U.S. forest products manufacturing competitiveness. Public policies in the regulatory, trade, energy, and tax areas are equally destructive. …

"We would encourage the Administration to attack these problems on several fronts. Tax: Reduce the tax rate on manufacturing income and reform tax rules for U.S. companies that sell products overseas. Regulatory: Sound science should be the root of all regulations. Benefits should outweigh costs. Energy: A new energy bill should increase access to natural gas on federal land. Legal: Restore sanity to the legal system by passing class action reform and solve the asbestos crisis. Trade: Secure tariff elimination on manufactured goods, end currency manipulation, and eliminate foreign government subsidization of new capacity building in sectors with excess capacity."

Changes in government policy are usually measured in many months, and the tangible results from any changes could be measured in years. For companies that have a shorter time frame to work with (and there's probably a lot of these), Van de Water reports that the PPC has begun an effort to do a better job in selling the benefits of paperboard packaging to the market.

"We feel that our industry has not done a good enough job of 'telling our story' to our customers, both producers and retailers," he admits. "We are working with AF&PA in a joint venture called the Paperboard Packaging Alliance (PPA) to better define the value proposition and convey the message to packaging decision makers."

Tony Petrelli, VP of marketing and business development for Caraustar, sees this effort as having an important impact earlier in the package design and development process. "A greater industry effort is underway to better educate the packaging design colleges and consumer package goods companies' marketing and brand management personnel. The results of these efforts will help our industry influence decisions for packaging strategies to take advantage of the branding, communication, stacking, storing, and dispensing advantages of folding cartons."

2003 and beyond…

According to Van de Water, 2003 was a recovery year for the folding carton industry, with dollar volume up 2.7 percent and tonnage up 3.2 percent at year-end. This was coming off a decline of 2.5 percent in sales dollars in 2002 vs. 2001.

Markens didn't see a whole lot of volume growth in 2003; what he did see was a reduction in margins. He reports that one of his clients actually increased its volume in the neighborhood of 25 percent, only to bring home the same profit as the previous year.

Ted Ratkus, Sr. VP of commercial sales for Shorewood Packaging, expanded on the economic climate in 2003, saying, "last year was two years." He saw a depressed market during the first six months, one characterized by overcapacity, inventory building, smaller order quantities, and fewer orders. In the second half, Ratkus saw dramatic change. "We finished the 4Q above budget, and it has continued through January," he reports.

Some of Shorewood's encouraging 4Q results stem from its consolidation and rationalization efforts done over the last several months. "We have taken capacity out," Ratkus states, "so has Smurfit-Stone, MeadWestvaco, Caraustar, and others. This started in 2002 and, for the most part, was completed in 2003."

PPC's projections for 2004 show a continuing positive trend. According to Petrelli, the PPC forecasts the folding carton market to grow 5.6 percent in sales dollars in 2004 vs. 2003, with tons shipped projected to grow 1 percent year over year. "This is a great indication that selling prices may be rising due to value-added applications and new packaging techniques. By 2007, the PPC projects the market to be around $9.5 billion [currently at $8.6 billion]," he says.

The coming year should see a continuing consolidation in the industry. Last year, Markens said the feeling was that "somebody has to go broke." But it hasn't happened yet. Although the majors appear to be doing all right, he wouldn't be surprised to see some consolidation at that level.

The year ahead will also be characterized by a further emphasis on speed-to-market, lean manufacturing, and produce-to-demand, says Ratkus. The resultant need for shorter runs and quicker turns will put ongoing pressure on converters to invest in new equipment in order to meet customer demands.

Speed-to-market is being enhanced by an increased focus on the front end of the package-printing business. More design collaboration is occurring between suppliers and customers in the drive to get it right the first time, "to be able to produce what's designed," says Ratkus.

Challenges and opportunities

Clearly, the biggest competitive challenge for the folding carton industry is coming from stand-up pouches. They are showing up everywhere on store shelves.

"The biggest threats to folding cartons the past few years and in the future will be the stand-up pouch with zipper closure systems and rigid plastic containers," says Petrelli. "The opportunity for folding cartons to combat these alternative material solutions is to incorporate designs that combine both paperboard and plastic materials."

Plastic folding cartons pose a longer-term threat for paperboard packaging, notes Ratkus. This alternative is two to three times more expensive and will always be dependent on volatile petrochemical pricing, but he sees it as a viable option, if only in some niche markets.

What may hold future promise for folding cartons is the whole area of smart packaging, including RFID. "The industry is working very hard to find opportunities and applications for packaging security, authentication, and interactive properties," says Petrelli. "The future of folding carton technology will be enhanced by interactive ink technologies such as lenticular image printing, temperature-sensitive (thermochromatic) inks, time-sensitive inks, bio-sensitive inks, and thermoconductive inks."

Van de Water expands on this idea. "My sensing is that we're in a nascent period of innovation for our industry. Paperboard substrates are ideally suited to some of the smart materials and devices that will be widely adopted in coming years. We're seeing fresh looks at the potentials of such things as surface qualities and shape grammar (consumer messages conveyed by shape). Inks and coatings suppliers are building on existing applications for printed RFID and new surfaces that both attract consumers, and offer product protection. Digital printing, in-line capabilities of web processing, and quick-change advances in litho printing are already being utilized for targeted promotions that are a trend in most markets. The carton converter that can figure out ways to apply these emerging technologies will be ahead of the game."

Strategies for success

Strategies for success in the folding carton sector revolve around three main areas of focus: cost reduction, innovation, and customer attention.

Markens points to the need for a continuing effort to drive costs out of the business. He cites such efforts as lean manufacturing, six sigma, and labor-reducing automation.

For Petrelli, it's "innovation, innovation, innovation. The trick will be to provide added value and consumer convenience in storing, dispensing, cooking, and consuming products without removal from the primary package."

Another area for adding value to the supply chain continuum is the focus on the "true needs of your customers," says Ratkus. By strengthening interactions and relationships, significant opportunities exist to help them be more successful. Mutually beneficial opportunities include collaborating in package design, co-locating equipment at the customer's plant, or having an MRP (materials resource planning) person visit the customer on a weekly basis to optimize ways to meet their supply needs.

Van de Water sums it up well. "The challenge for carton converters has been, and will be, to continually reduce operating costs while finding growth opportunities through innovation: it's that simple, and that big. … For individual converters, those who help their customers to differentiate themselves in the marketplace and can demonstrate a contribution to market lift at retail will enjoy the best prospects for profitable growth."

Resources

AF&PA www.afandpa.org

Converter's Res. convertersresource.com

The Freedonia Group freedoniagroup.com

National Paperbox Assoc. paperbox.org

PPC www.ppcnet.org