There are hurdles indeed, but there’s also a big carrot at the end of the stick.

By Tom Polischuk

Flexible packaging is a dynamic area for package printing. Although other package-printing segments, such as tags and labels and folding cartons, are following a relatively normal course of innovative solutions, flexible packaging is experiencing a step increase, moving into packaging areas that are the domain of competing packaging methods—most notably, rigid containers.

In a study titled, “Converted Flexible Packaging,” released in January 2006, The Freedonia Group predicts that the demand for flexible packaging will increase more than 4 percent each year through 2009. The advantages that flexible packaging offers over rigid packaging include cost, performance, and source reduction (less material used). Growth will also be fueled by technical advances in breathable films and resealable stand-up pouches, along with manufacturers’ requirements for high-impact graphics.

The study zeros in on pouches as being at the leading edge of the growth curve, projecting demand to rise at a 6.6 percent annual rate through 2009. Although flat pouches will see solid gains, stand-up pouches will be where the action is. The study cites advantages that include excellent visual appeal, product differentiation, convenience, portability, and reclosability.

In the overall packaging market, the food industry will be on the higher end of the growth curve at 4.3 percent per year, says Freedonia. Consumer demand for convenience and single-serve unit packaging will help drive the growth. In non-food markets, growth is projected at 3.7 percent, with the best opportunities in the pharmaceutical and medical markets.

According to the study, one item that will likely constrain the business opportunities for North American suppliers is the shift to offshore production in many consumer products markets. This is a trend that will be watched closely for many years to come.

How was 2005?

Marla Donahue, president of the Flexible Packaging Association (FPA), reports “the flexible packaging industry had a pretty good year, especially considering the impact hurricanes Katrina and Rita had on oil, gas, and resin prices and availability. U.S. flexible packaging annual sales grew to more than $22 billion, a growth rate of 3.8 percent, continuing its trend of outpacing U.S. GDP. Profit margins did suffer, but are expected to increase again in 2006.”

Frank Romano, professor emeritus at the RIT School of Print Media, has similar views of the past year, saying “2005 was a decent year for flexible packaging revenues.” He estimates revenue growth at about 5 percent over 2004, to around $20 billion. However, he also acknowledges that “profits were strained by everyone in the supply chain.”

The negative impact on profit margins clearly came from the sharp rise in oil and energy-related costs. These cost increases “have impacted manufacturing, distribution, and packaging—and will hurt all companies, and eventually consumers,” states Romano. “Cost will always be a factor, and the rising costs of both energy and substrates cannot easily be recovered by printers/converters.”

The inability to pass through costs was felt by flexible packaging suppliers and converters alike. Dr. William Llewellyn, senior consultant for AWA Alexander Watson Associates BV, says that raw material suppliers (paper and resin) were not able to pass through all the increases resulting from higher energy costs. As a result, “Overall supplier margins have been reduced as internal cost saving exercises only partially recovered the increases, or are only becoming effective toward the end of the period,” he says.

At times like these, flexible packaging converters/printers can find themselves in a real tight spot in the supply chain, caught between large material suppliers on one side and large customers on the other. According to Karen Allenstein, director of marketing services for Amcor Flexibles, “The margins on packaging cannot absorb the types of cost increases experienced, and customers don’t want to accept the price increases they are unable to pass along.”

In addition to the dilemma of absorbing cost increases, flexible packaging converters were also faced with the loss of potential business, as customers looked at alternative solutions. Bob Biddle, president of Ampac Flexibles, Converted Products, said that his company was fortunate to have good customers that were willing to work with them through these “highly unusual times.” However, they did feel the impact from competitive packaging solutions.

“The problem with this rapid increase in raw materials is that some potential customers found other packaging solutions for their products,” states Biddle. “These solutions may have been in a less attractive or sustainable product, but a product that appeared to have more price stability.”

Looking forward

High energy-related costs will be a dark cloud hovering over the global economy for the foreseeable future, and companies are taking the necessary steps to adjust to the repercussions. As the market moves beyond this hurdle, there is still much to be positive about in the flexible packaging sector.

Donahue has an optimistic outlook for the next few years. Especially in 2006, she estimates that growth in sales revenue will be 7-8 percent, with volume growth expected to be as high as 10 percent. The difference in volume growth vs. revenue reflects the inability to pass through some of the cost increases.

Over the next five years, she expects revenue growth to average 5-6 percent and volume growth to come in at 7 percent. The optimism comes from the ongoing market penetration in new product categories. “Innovation continues to drive the growth of the industry resulting in new market creation, as well as replacing other packaging formats,” says Donahue.

AWA forecasts slightly lower revenue growth for the North American flexible packaging market, projected to be between 3.3-3.5 percent CAGR through 2010. According to Corey Reardon, president and CEO of AWA, the growth will come from a number of factors: continued shifts from rigid/semi-rigid to flexible packaging, continued growth in stand-up pouches, drive for reduced packaging costs, technology innovation, and consumer demand for convenience.

The use of innovative technology has been at the root of flexible packaging’s success for many years now. Donahue highlights a couple of examples that have helped to propel flexible packaging to the forefront of the ongoing battle for shelf impact.

One example is Sonoco’s SonoMet technology, a combination of ink and cylinder technologies that gives a package a metallized appearance. In addition, she notes the high-quality of graphic reproduction being seen today is a direct result of improvements in flexographic prepress platemaking processes. She expects the continued innovation in films, printing technology, coatings, and inks to have a continuing major impact on the acceptance and growth of flexible packaging.

Innovation in the flexible packaging arena will have the most visibility in pouch applications—novel implementations are coming out on a regular basis. Biddle believes that much of the growth opportunities will come from the food and beverage industry.

“I think the marketplace will accept flexible pouches for water and juices more readily than it does today. In Japan, the norm is drinks in pouches. I believe when people see the magnitude of the PET bottle landfill issue, the pouch will become preferred. Also, I believe we are just beginning to see products in retort pouches. This market will grow significantly in the next few years.”

Somewhat further out in time, Reardon believes that intelligent packaging technologies will impact the market in areas such as track-and-trace capability to improve distribution and meet legislation for product security, monitoring, and quality. He sees nanotechnologies being used to “provide increased barrier or active packaging technologies (anti-microbial, scavenging, etc.), which will be an important route for providing flexible packaging with the increasing complexity to meet the changing demands for fresher produce and enhanced shelf life.”

Romano takes a similar view of the future saying, “The next big thing in flexible packaging will be ‘smart packaging.’ This will include new types of printed electronics, disposable color displays, printed batteries, and many new forms of disposable sensors. Smart packaging is transforming food, consumer goods, and healthcare, preventing illness and increasing profit margins. ... Someday, packages will communicate with the Web and your cell phone.”

Getting there from here

Although the mainstream use of smart packaging will be seen by many of us in our lifetimes, it is still sufficiently out in time that only the early-adopter contingent is involved to any degree. In the meantime, there are a number of challenges to be dealt with.

Beyond the pressing issue of energy costs discussed previously, the North American flexible packaging industry is facing challenges from imported packaging, along with the movement of product manufacturing overseas. Donahue, for one, is confident in the ability to face up to the challenge, saying, “the innovative nature of the U.S. flexible packaging industry will enable it to successfully compete against imports.”

To aid in this effort, the FPA is in the process of conducting a market research study on the impact of globalization on the U.S. flexible packaging industry. It will include examples of successful business models for competing regionally and globally, along with strategies for mitigating barriers and risks for the U.S. industry, says Donahue.

Within the North American borders, additional competition is being seen by the “extension of the printer base to include more commercial printers,” says Reardon. “Already, packaging represents a significant proportion of the product portfolio for many commercial printers.”

Flexible packaging is a further stretch for commercial printers than other packaging components such as folding cartons, but as these printers look for growth in related printing markets, flexible packaging could be a tempting target.

Romano estimates that the U.S. has about 3,100 presses used for flexible packaging, located in about 440 establishments. The industry is “complex and exciting, with constant change and relentless competition,” he says. “To stay ahead, they [converters] must stay ahead of both consumer and technology trends. ... The next five years will be challenging for progressive flexible packaging establishments. If converters keep up with the changing technologies, they will prosper.” n

Resources

Alexander Watson Associates www.awa-bv.com

Amcor Flexibles www.amcor.com

Ampac Flexibles www.ampaconline.com

Flexible Packaging Association www.flexpack.org

The Freedonia Group www.freedoniagroup.com

RIT School of Print Media www.rit.edu