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State of the Industry Report: Profit in the Proper Package
August 1, 2005 By: Tom Andel Paperboard PackagingWhat's the state of the paperboard packaging industry? You'll get a wide variety of answers to that question depending on whom you ask. Ask a consumer and she'll likely shrug her shoulders, not certain what you mean by "paperboard packaging."
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Walk down the aisle of that consumer's grocery store with her. Point out the colorful animated displays along and at the end of each aisle — and note that they're made of corrugated board.
Point out the boxed wines. The juice boxes. The planters in the garden department. Paperboard packaging innovations are all over the place, containing, protecting and selling product. Chances are that consumer has made purchasing decisions based on messages sent by paperboard packaging. It has become integral to the selling process in all retail environments.
 WORLDWIDE CORRUGATED MARKET |
After this tour, ask that consumer again. "What's the state of the paperboard packaging industry?"
"I guess it must be in pretty good shape," she'll probably answer.
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Now send in a paperboard industry analyst. Jim McNutt is executive director of the Center for Paper Business and Industry Studies at the Georgia Institute of Technology.
"The state of the industry is okay to okay plus," he says. The negatives are that the bigger companies have become more vertically integrated in the corrugated area by owning more box plants. They're less flexible and innovative as a rule. But I also think their corrugated box divisions are generally operated with a fair amount of autonomy from the mills."
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Fulfilling Needs
The process of making the box itself is where the industry is reaching out and adding value. Packaging companies are beginning to look at themselves more as needs fulfillers. There are more options to innovate. Many innovations come as a result of partnership with equipment vendors, McNutt believes.
 EUROPEAN CORRUGATED MARKET |
"The original big new box plants in the 1980s were built to crank out square footage of brown corrugated," he says. "The newer ones are designed so they can perform an enormous variety of production tasks. There's more collaboration between the box plants and the equipment folks in the packaging industry than there is in the paper making area because if someone needs a special finish machine or a flexo folder-gluer that works a certain way, they may have some tight relationships to make those things happen."
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Many packaging equipment suppliers are moderate to small in size. McNutt says that makes it easier for converters to work with them on making innovative designs, and maybe sharing design costs in return for a share of output at the other end. He believes there is more true collaboration between the equipment manufacturers in the packaging end of the industry than there is in pulping and paper making. This means the fortunes of box makers and equipment vendors are tied together, more than ever.
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There are also more opportunities for product engineers who are the customers of those box makers to make new innovative things that can be sold on television at 3 a.m. and shipped in tamper-proof packaging and arrive at the customer's doorstep in one piece.
Indeed, even when manufacturing slumps result in bad news for all kinds of packaging, corrugated's saving grace may be healthy online consumer shopping.
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Enter Alternative Materials
Paperboard's greatest opportunity in competing against alternative materials is in services and special products, says Esther Palevsky, a packaging industry analyst with the Freedonia Group, Cleveland.
"Services like high-end graphics, laminating, metallizing, etc., will help box producers compete against various packaging alternatives," she says. "Also, more use of materials like white top board, which enhances the appearance of boxes for consumer products. Research and development also is important, particularly in improving box durability and performance in cold or wet environments — and especially for boxes for beverages and frozen foods."
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Folding carton converters continue to face stiff competition from alternate substrates, especially from flexible film formats such as pouches. While many markets like beverages have remained stalwarts for paperboard packaging, Jerry Van de Water, president of the Paperboard Packaging Council (PPC), points to erosion in some categories like snack foods and pet products, but identifies innovation as the saving grace.
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"A renewed commitment to innovation has resulted in ever-higher print and finish enhancements, coatings with better barrier properties, and uniquely functional structures," he says. "PPC's advertising program for 2005 is emphasizing to brand managers the competitive advantages of speed-to-shelf at retail, point-of-sale impact — no other format has as great a billboard effect in stores — and consumer ease of use."
 CHINA CORRUGATED PRODUCTION VOLUME 2000-2005 |
Even on the corrugated side of the market, there's recognition for the need to innovate using other materials. While the big six integrated firms in the U.S. corrugated market are a major industry force, independent corrugators are looking at a number of options to remain competitive. The independents still claim only about 24 percent of box shipments, but Palevsky says sales partnerships and small-run custom work will help the independents compete with the big guys for national and multinational opportunities.
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Can You Say Plastic?
Such partnerships might include the mingling of lines that in previous years were as separate as church and state.
"Why are we afraid to say plastic?" asks Steve Young, president of the Association of Independent Corrugated Converters (AICC). "Heck, sell them. If it is a more effective solution for the customer's distribution system, why not provide it? I know members selling plastic totes and bins because the customer needs them. There's opportunity in other materials, not competition. The guys selling plastics are selling into companies that also use corrugated. It's the package in the distribution system that's important not the material being used."
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Market Trends
Young says even in those areas where corrugated competes with plastic, corrugated has been performing better lately. It started in agriculture when the Corrugated Packaging Alliance (CPA), the Fibre Box Association (FBA) and American Forest & Paper Association (AF&PA) created a common footprint that would allow corrugated containers to nest.
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Opportunities on the folding carton side shadow product trends in consumer markets and are setting the stage for growth in the coming year. According to forecasts prepared for the PPC by Resource Information Systems Inc. (RISI), folding carton converters can expect a slow 2005 with recovery starting in mid-2006. Van de Water says folding carton converters in several industries are particularly well-positioned to prosper in that interim period.
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"The greatest growth is occurring in pharmaceutical/healthcare, beverage, and frozen foods categories," he notes. "Fast food and carry out sub-segments are growing at 15 to 20 percent, or much faster than broader categories of food. Sales of packaging for natural products, a focus of the 'Strategies Conference' at PPC's spring meeting, cut across several traditional classes of products and bring growth exceeding 20 percent. In beverages, fast growth in flavored waters and nutritional supplements are outpacing beverages overall."
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However, Wim Hoebert, secretary general of the European Federation of Corrugated Board Manufacturers (FEFCO), says safety consciousness has become a prevailing challenge across several packaging sectors internationally.
 EUROPEANS MOVING FROM PLASTIC TO PAPERBOARD |
"For over a century now corrugated and solid board materials have built up a track record of reliability for packing food stuffs," he notes. "However this is now being totally disregarded as the idea to apply multi layer regulations to the paper/board layer progresses. As an industry we will have to convince those involved that this scheme will not improve health or reduce risks, but only increase costs for the consumer."
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Along the same lines, there is now a clear demand for Good Manufacturing Practices (GMP), including hygiene management and transparency. This is coming not only from the food processing industry, but from retailers who want to make sure packaging is manufactured in a controlled environment as far as quality, hygiene and traceability are concerned.
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"Because of the different natures of the packaging materials used it is important that we promote a vertical standard, one that meets the general accepted principles and requirements, but yet takes into consideration the specific nature of the industry," Hoebert concludes.
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Pricing and Purchasing Pressures
Converters are finding ways to be more flexible in the face of overseas market pressures, especially China. For example China's production of some resin-based products has picked up in the last five years, putting pressure on the supply of raw materials like glue and adhesives. China also has a number of new paper mills coming on-line with state of the art automation and quality systems. This will drive more competition in the United States as these new players on the world market try to enter the United States with this new capacity.
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These pressures will put U.S.-based converters to the test. Converters have to be smarter, not only about selling their products, but about sourcing and purchasing raw materials. Ben Graham, head of the Chicago sales office for Bell, Inc., and marketing manager of the Independent Carton Group (ICG), says some smaller folding carton and corrugated suppliers may soon find it more difficult to get adhesive supplies. Situations like that are the reason ICG was established. It's a buying consortium whose members include independent folding carton companies.
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"The West Coast is going to be more vulnerable to raw material issues, being logistically closer to China than the rest of the U.S.," he says. "The West Coast has already seen raw material shortages and some dumping by Chinese competitors. As China's ability to compete with U.S. paper mills increases, companies that source on the open market for paper will benefit. The independent companies will tend to have much greater purchasing freedom than the vertically integrated converters. The larger independents or those with combined purchasing clout will benefit the most from this increased competition."
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Globalization of supply and competitive pressures also have brought about consolidations in the industry. Larger, integrated converters have shuttered smaller, less-efficient facilities and rationalized timber assets. Van de Water says several entrepreneurs are seeking to reinstate a "middle market" on the folding carton side — firms in the $100 million to $1 billion size range — through acquisition roll ups.
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"Smaller independents, too, have turned to joint venturing and downstream service integration to broaden their market scope," he adds. "We've seen increasing emphasis of printer-converters on understanding customer requirements and values as they prepare to penetrate their larger accounts, or enter new segments. There's also been a renewal of interest in strategic planning as a means to define core competencies and identify growth opportunities that are viable and a good fit."
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Logistics may be one of those core competencies, Young says.
"We're selling a distribution system solution," he says. "We need to know how boxes fit in the trucks and on the pallets and how they perform in those environments. We need to understand total cost of ownership of the package, and how the customer uses the box once it leaves the shipping dock of the converter. Are boxes taking up 10,000 feet of warehouse space as inventory and how much does that cost the customer?"
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High-Hanging Fruit
Knowledge about customers will put converters in a better position to understand pricing dynamics. This has been a tough year where pricing is concerned. Pulp and Paper Network, LLC, an industry news service that has strategic alliances with publishers and news services worldwide, including Dow Jones Newswires, recently reported that four consecutive months of lower volumes stifled the success of a containerboard and corrugated price initiative this spring, and that current prices are showing weakness.
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It quoted Smith Barney Citigroup's pulp and paper analyst, Chip Dillon, to support that claim. He says U.S. containerboard producers would not be able to successfully implement a price increase this year. In fact, he's forecasting a $50 price decrease over the course of 2005.
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"We see prices eroding to a $380 per ton level (42-lb) by early 2006," Dillon writes in a research note. "We believe the combination of weaker-than-expected corrugated box demand and a greater-than-expected impact of new non-North American capacity will cause containerboard prices to fall into 2006 and then post a vigorous recovery starting by 2007 as global capacity growth slows in this grade starting in next year's second half."
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While waiting for that price recovery, there are things converters can do to counterbalance these market pressures. Learning more about customers is a big one.
"We're better educated about our customer's needs and how the customer purchases and uses the product," he says. "That's the beneficial effect of Wal-Mart on our industry. It's not low-hanging fruit because it takes work to get that knowledge. It's actually higher-hanging fruit. You have to reach for it, and the benefit is better margin. You get more for your product because you can show your customer what you'll be saving them."
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But converters also must look inward at their own costs. Van de Water notes that pricing pressures in the marketplace remain a constraint on all printer-converters.
"Cost reductions are essential to retain business these days," he concludes. "Converter staffs are expected to do more with less and still come up with ways to cut costs and thereby preserve margins. That's why box makers are adopting lean manufacturing philosophies — to eliminate waste."
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Knowledge of their own and their customers' operations will help both folding carton and corrugated box converters sell the value of their products. They might not make a fortune, but they'll ensure a brighter future for paperboard packaging.
