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Census Report 2006: Moving Upward
June 1, 2006 By: Esther Durkalski Hertzfeld Paperboard PackagingExclusive 2006 Census Report: Moving Upward
The corrugated container industry is finally trending upward. It's not the small uptick that's been seen for the past two years; Converters feel the corrugated container industry is moving forward by leaps and bounds. Unfortunately, the folding carton industry isn't seeing the same prosperity. Converters' view of this industry has worsened since last year, but that hasn't stopped them from investing and making production improvements to achieve a recovery.
THE CORRUGATED CONTAINER INDUSTRY
The corrugated container industry is on the mend — more than 50 percent of converters describe the industry as healthy or thriving. While only 5 percent view the industry as thriving but it is a major improvement over last year when only 32 percent of converters thought the industry was healthy or thriving.
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This year, 36 percent of corrugated container converters describe the industry as stagnant while 14 percent see the industry as depressed.
Converters reporting a healthy and thriving industry do so because 80 percent are seeing profits and growth. A stagnant or depressed corrugated container industry reflects the following business environments: General decline (40 percent), poor economy (39 percent), overcapacity (23 percent), competition (10 percent), prices (9 percent), cost cutting (5 percent), and plastics (3 percent).
Converters' top concern, like that of U.S. consumers, is higher energy prices, followed closely by an increase in raw material prices. Other major areas of concern are customers not wanting to pay more, manufacturing moving elsewhere, and industry overcapacity. Competition, consolidation and plastics round out converters' worries.
Most converters are implementing cost cutting measures and efficiencies as the most effective way to improve business conditions. "We are working on fast turnaround, improved customer service, and creating a 'learning organization' to improve quality and reduce waste," says a corrugated container converter in the Los Angeles area.
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Just like last year, corrugated container converters' strategies to deal with the changing business climate are tied to efficiencies. Converters are continuing to look inward to produce more effectively. Seventy-seven percent of converters say they have implemented strategies such as lean manufacturing, cost cutting measures, waste reduction, and layoffs to compete. Sales and marketing strategies, such as entering non-traditional markets, niche marketing, and market specialization, are marked by 32 percent of corrugated converters as a successful business policy. New machinery, equipment upgrades, and new product development are part of the investments converters are making as a business strategy.
The data suggest that corrugated box plants are starting to invest in their business and services they offer. Customer service leads the pack in unique offerings with 45 percent – offerings such as presenting innovative solutions and one-stop-shopping. Forty-two percent of corrugated box converters say new product lines, graphics/printing, higher product quality, and machinery investments are the offerings that set them apart from the competition.
Converters report that inventory control/warehousing is the most important service for their customers these days. Supply chain management also is important. Fulfillment is only marked as somewhat important. Converters indicate that commercial printing and contract packaging are not very important to their customers.
While RFID is still a hot topic among consumer product goods companies and big box retailers, corrugated box converters indicated that RFID is not important to their direct customers.
Corrugated Container Equipment Spending
Spending on corrugated container equipment is up from last year. Thirty-eight percent of converters are spending more than they did in 2005 while 37 percent are spending the same. That is up from 35 percent spending more in 2005 than in 2004. Only 25 percent are cutting back on their equipment spending, which is a four percent increase from 2005.
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The 38 percent of manufacturers who are spending more on equipment in 2006 cited investment — the answers indicate a general sense of an improving economy and economic growth. Other reasons for spending more are increased growth/demand (34 percent), efficiencies (15 percent), and the improved economy (11 percent).
A few converters mentioned that they are purchasing specialty machines to open new markets as the reason why they are spending more this year. Several converters also mentioned that their equipment upgrades were done to eliminate overtime — a costly hindrance to profit margin growth.
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Also the 25 percent of converters that are cutting back, indicated they invested in machinery in 2005. Two out of three have just spent money on new equipment in 2005 and that is why they are cutting back. This suggests an upswing began in 2005 and is continuing in 2006. Other reasons for spending less include financial reasons (27 percent), poor sales (14 percent), and a poor economy (6 percent).
Material handling equipment was the most recent equipment purchased for 17 percent of the converters while 11 percent recently purchased a diecutter. Other most recent purchases are:
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More than a third of the converters who were purchasing equipment did so to produce different types of boxes. Twenty-eight percent purchased to open a new industry while 12 percent did so to increase their printing capabilities. In-house efficiencies (11 percent), new services (10 percent), and new geographical markets (7 percent) completed the purchasing reasons.
The data show that converters are adding diecutters, printing presses, gluers, safety equipment, and stackers while control systems, corrugators, slitters, material handling and converting equipment are more likely to be replacement machinery.
Technology and price are the main drivers of a converters' reason to purchase from a particular machinery manufacturer. Converters purchase because of:
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Corrugated Container 2006 Production Spending
More than half of converters are spending the same as 2005 on production while 38 percent are spending more than they did in 2005. Of the converters that will be spending more, more than half cite costs they don't have direct control over, such as energy, utilities and raw materials costs. Thirty-six percent say the increases will be equipment related while 24 percent say it is labor-related.
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Of the 11 percent of converters who will be spending less on production this year, 33 percent will do so due to labor decreases. Twenty-five percent of the converters who are spending are just cutting back in all areas while 22 percent have achieved greater operational efficiencies.
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FOLDING CARTON INDUSTRY
The folding carton industry isn't seeing as much growth and prosperity as the corrugated industry has in the last year. The industry has gone from 48 percent viewing the industry as healthy or thriving in 2005 to 39 percent feeling that way this year. Converters have gone from 52 percent viewing the industry as stagnant or depressed in 2005 to 61 percent this year.
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The converters that view the industry as healthy or thriving say it is primarily because they are seeing increased profits and growth (78 percent of respondents). Healthy competition, running plant at capacity, and a healthy economy each garnered 12 percent of the respondents' reasons why the industry is doing well.
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Forty-four percent of the respondents who view the folding carton industry as stagnant or depressed say it is because there is just a general business decline, such as no new business, lower profits, and flat or declining sales and growth. Industry overcapacity (26 percent) and the poor economy (25 percent) were other reasons why the industry is viewed as doing poorly.
Several converters said the industry has too much capacity and that's why business is doing poorly, especially for the smaller independents. "There's low or no growth in the largest market segments," says one independent converter in the Northeast.
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Another converter in the Southwest says the industry growth is well under GDP growth per annum.
Just like corrugated container converters, folding carton manufacturers are most concerned about higher energy prices. They are also very concerned about the high raw material prices. Overcapacity, manufacturing moving, and competition all ranked lower in folding carton converters' worries. The least concerning condition for folding carton converters is industry consolidation.
"There are no new business opportunities we are competitive for," says a Northeast converter. "We're losing some clients to overseas manufacturers."
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Just like last year, folding carton converters' strategies to deal with the changing business climate involve increasing efficiencies. Seventy-eight percent of converters say they have implemented strategies such as lean manufacturing, cost cutting measures, waste reduction, and staff reductions. Sales and marketing strategies are recorded by 38 percent of folding carton converters as a successful business policy. Twenty-eight percent of folding carton converters say new machinery, equipment upgrades and new product development are part of the investments converters are making as a business strategy.
The data show that increasing the profit margin is key for folding carton converters. Forty-six percent say they are offering innovation/design services, new product lines, increasing automation, and new equipment capabilities. Customer service is seen as an important competitive standout for 37 percent of converters while 31 percent say they are making process improvements and efficiencies to increase margins.
Folding carton converters are diversifying their product mix to offer other choices to their customers. More than half of folding carton converters are manufacturing additional products. The most offered are corrugated boxes and displays, followed by other materials such as plastics, vinyl, metals, bottles, film, foam, and flexible packaging. Commercial printing also is being done a lot by folding carton converters.
Several said they are focusing on process improvements and flexible and lean production techniques to improve profit margins.
Folding Carton Equipment Spending
Despite most converters viewing the industry as stagnant and/or depressed, the majority are spending more on equipment than they did in 2005. Approximately 38 percent are spending more in 2006, compared to 41.2 percent who were spending more in 2005 compared to 2004. Twenty-eight percent are cutting back on equipment spending this year, compared to only 18 percent who were doing the same in 2005.
But the numbers aren't as bad as they sound. Of the 28 percent of converters who are spending less on equipment this year, 72 percent say they made their big purchases in 2005. Other reasons converters are spending less is due to financial constraints (18 percent).
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Of the converters who are spending more on equipment in 2006, more than half say they need to keep up with technology and/or need an upgrade or replacement. Forty-six percent cite the need to increase capacity, expand operations ,and/or need to enter new markets as their purchasing decision.
Printing presses and folder-gluers were the top most recent equipment purchases as 18 percent and 17 percent of respondents respectively note. Ten percent bought adhesive/gluing equipment, 9 percent bought diecutters, 6 percent purchased converting equipment, and 6 percent material handling equipment.
The majority of folding carton converters purchased equipment to open up a new market – 83 percent.
Folding Carton Production Spending
More than half of the converters anticipate spending the same on production in 2006 (54 percent) while 36 percent expect to spend more. Only 10 percent are cutting back.
Reasons why converters expect to spend more on production include raw materials price increases at 18 percent. They also expect to pay more for labor (22 percent) and for customer services (18 percent).
Of the converters who are spending less on production, 36 percent say they are cutting back in all areas of business, followed by 29 percent saying they are spending less on labor.
For more detailed, in-depth information from Paperboard Packaging's Exclusive 2006 Census Report, including more on how the corrugated and folding carton industries are doing and what converters are purchasing, visit www.packaging-online.com/Census2006. More statistics and a summary will be available in a new bi-weekly enewsletter. Sign up for Box Biz on our site and you’ll get this exclusive information delivered directly to your inbox.
Methodology: Researchers at Penn and Associates, Inc., a Cleveland-based marketing research services company, collected 492 completed interviews from corrugated plants around the world, and 205 from folding carton plants, via a URL. The number of completed interviews means that Penn and Associates have a 95 percent confidence, plus or minus 4.5, that the results of the study would be the same if they had interviewed all plants.
