Recovering with Cautious Optimism
Seven flexible packaging industry leaders, including converters, suppliers, and association managers, share their insights into the state of the flexible packaging industry.
Economic UptickFlexible Packaging: The economy has been at the forefront of business decisions. There are talks of an uptick in growth, but how do you see the economy doing this year? What does that mean for your company and/or the industry as a whole?
Timothy Lewis: We are optimistic that the U.S. economy in general, and our business and industry specifically, is improving, but at a slower growth than we had expected. We anticipate that consolidation, some pent-up demand and more readily available credit will make 2011 an excellent year.
Jon McClure: We witnessed a strong rebound in 2009 and 2010 both were record years for ISO. The flexible packaging industry as a whole has grown through the recession. Over the past 24 months ISO has doubled its capacity to meet the growing demand of our customers.
Robert Tewksbury: If left alone, the economy should continue to recover, but this year will be impacted by the volatility of oil prices and threat of inflation. I tend to be optimistic, regardless of the economic outlook, as there are always opportunities for continued growth in both up or down markets.
Art Yerecic: One of the services TLMI provides to members is the TLMI Biannual Index & Trend Report, which closely tracks indicators and economic indices directly relevant to the North American packaging industry. The Report indicates sustained growth in primary end-use categories TLMI converters serve, including food, beverage, pharmaceutical and personal care/cosmetics. Our research indicates a slower growth in 2011 and resurgence in 2012.
TLMI members continue to report a general mode of recovery. Companies remain cautiously optimistic as they fine-tune their business strategies and capital equipment purchasing plans for 2011.
Marla Donahue: There appears to be well founded optimism in the flexible packaging industry. Unlike many industries that experience double-digit declines during the recession, the flexible packaging industry held its own. There was no growth in flexible packaging in 2009. However, 2010 saw about 2.5 percent growth and 2011 growth is expected to be back to pre-recession levels of over 3.5 percent.
Michael D’Angelo: From the perspective of capital equipment supply, as a general statement, the macro-economy trumps the market economy. In other words, buying decisions may be delayed even if the customer’s business is currently doing well. Customers want to have a longer term reassurance before making commitments. The fact that there is optimism in the economy growing and the fear of a double-dip recession is declining gives equipment suppliers good reason to look forward to 2011, as 2010 was already a recovery year as compared to 2009.
Larry Lanham: We have enjoyed substantial growth in 2010 and are forecasting double-digit growth in 2011. Our outlook is bullish for food packaging and stable for industrial for 2011. For our two major segments, a fairly good barometer of industry demand, this added growth enjoyed is attributed primarily to new projects as opposed to increased market share. While we view the food packaging business as being recession resistant, we feel the increased volume of new projects indicates general and continued economic growth within the industry.
Unanticipated SurprisesFP: What was the biggest surprise or the most unexpected affect on business in 2010? Do you see that happening in 2011?
D’Angelo: Not that it was a surprise, nor is it meant to be a pun, but the elasticity of the flexible packaging business is noteworthy. As an industry it continues to outperform GDP, outpacing growth in a good cycle and lagging contraction in a bad cycle. The basis of the industry in more stable sectors, such as food and beverage, gives it great strength and a firm foundation going in to 2011 and beyond. We found the equipment buying in market in North America to be strong in 2010 and this ran contrary to popular opinion. This is likely the result of pent-up demand from those who took a wait-and-see approach in previous years, as well as those customers who became more comfortable with the macro-economic environment and felt the time to invest was right. A lot of companies have cash and a lot of companies wanted to take advantage of the great interest rate environment.
Donahue: The biggest surprise from the association standpoint was the growth and rapid recovery of the industry from 2009.
Lanham: The biggest surprise was the magnitude of growth. We outperformed our 2010 projections by nearly double. Moving into 2011, we expect this trend to continue. The activity level and desire for innovative new packaging appears to be back in forefront of marketing departments, driving new projects.
Further, the urgency and pressure from Big Box retailers on manufacturers to reduce their carbon footprint and move to more sustainable packaging has created further demand for innovative, valued added, differentiated flexible packaging.
Tewksbury: I think what surprised us the most was incredible growth exceeding our most optimistic projections. Like other companies, we saw it beginning in January and expected it was another sales spike – no different than the same ups and downs we had experienced for several quarters prior. By the second quarter we realized it had become a trend, and by third quarter, it was already challenging our planning, scheduling and inventory management.
If the first three weeks of 2011 are any indicator, the answer is a resounding yes, not only is business activity going to be sustained, but there will also be strong continued growth for us worldwide. In fact, for the first time in a couple of years we are adding employees, restructuring our organization and implementing a new database to help us to capitalize on the crest of this wave of activity.
Lewis: The converting and packaging equipment sector of our industry was quite volatile and some of the closings and consolidations among our own competitors and colleagues were surprising. But this scenario was mirrored in sectors throughout the U.S. economy over the past 18 – 24 months, with some areas being hit harder than others.
We are optimistic that with the extension of important tax cuts and loosening of available credit, demand and orders will ramp up and the companies left standing after a very rough couple of years will reap the rewards of prudent management and innovative market solutions.
McClure: Resin outages. A decade ago there were ten suppliers of base raw materials of low-density and linear low-density polyethylene. Today, 4 suppliers control over 87 percent of those materials. One reactor goes down and it creates a ripple effect throughout the industry. With crude oil approaching $100 per barrel, the North American polyethylene producer has a cost advantage with Natural Gas hovering below $5 per million Btu.
Yerecic: Perhaps it’s not a surprise but I was extremely impressed by the numerous advances made by the narrow web industry. This industry’s printing capabilities continue to make giant strides.
Lean manufacturing techniques were also at the forefront of 2010. Increased throughput and waste reduction opportunities were found from prepress solution providers, press manufacturers and in finishing operations. One-hundred percent inspection continues to make headway. Successful converters and suppliers will need to continue to invest in making their processes even leaner to meet the challenges of the marketplace.
Biggest AssetFP: What do you think will be the biggest asset in this industry for 2011?
Donahue: Probably the overarching asset is its innovative problem-solving approach to developing packaging solutions.
D’Angelo: The creativity of the printing and converting companies in meeting their customer’s needs remains the industry’s biggest asset and serves as a challenge to the suppliers to the industry to continually innovate. There is dynamism in the flexible packaging industry that propels it to overcome the challenges of economy, changing trends and competing developments. Virtually any change in the habits of the American public lead to the need for a response from the flexible packaging market.
For example, it wasn’t too many years ago I would travel to Europe and see stand-up pouches everywhere, while here at home, they were nearly unknown. The speed of change in this country demands that everyone involved in the marketplace have creative agility. We’re fortunate as an industry that so many do.
Lanham: Understanding customers’ needs and exceeding their expectations with viable flexible packaging solutions and alternatives to properly address the pent up demand for revitalized existing SKUs as well as answering the increased sustainability desires.
Lewis: Without a doubt, our industry’s biggest asset is its people. We are fortunate in the converting and printing industries to have a generation of experienced professionals who have worked their way up, learned and developed new technologies, and remain as passionate a group of professionals I have ever known.
These same seasoned veterans are eager to train the new, fresh minds of today’s graduates – who will no doubt usher in more efficient, productive and sustainable processes and products to ensure the continued health of our industry.
Yerecic: One of the greatest assets of the narrow web industry is the sector's ability to withstand market and economic shifts with an unwavering resilience. As run size demands continue to trend downwards and lead times minimize, the narrow web industry is uniquely positioned to exploit these opportunities.
Every year TLMI conducts extensive research amongst consumer packaged goods companies; asking packaging buyers about their sourcing trends and forecasted application migrations. One important trend our research has uncovered is how some end-use products will migrate from a particular packaging methodology to another. Over the past decade, a common label decoration migration has been away from cut-and-stack, or glue-applied, labels to pressure sensitive labels. Our research is indicating that certain end-use product sectors are going to leapfrog pressure sensitive and go directly from glue-applied to shrink-sleeve applications. This is an ideal scenario for TLMI members, taking market share away from the offset-dominated glue applied market and carving out a niche in converting shrink sleeve applications on their narrow web presses.
Tewksbury: Overall, it is the ability to adapt to changing market demands, respond quickly to customers’ urgent needs and produce quality products. I believe the biggest asset is and always has been about customer service. You have to give your customers an experience that stands out among their experiences. If you think about it business has become less personal, as we went from phones to faxes to emails, it's still all about people and relationships. It's about truly caring for your customer's needs and wants while building a solid relationship; it's not always about the sale.
McClure: The North American Market will continue to grow.
Cost of MaterialsFP: There is a lot of talk about the cost of materials going up. Are you concerned with these changes in price, and if so, how do you plan to accommodate it?
Lewis: Material prices are a big issue with our customers, and looking for ways to run thinner, lighter films with unique strength properties is one solution. Running the film on equipment that reliably produces the product at high speeds with very little waste is another. Getting the most out of the resin you run by having a scientific approach to your operating efficiency is also imperative. We continue to develop technology for superior sealing quality.
McClure: I am not real sure which planet Federal Reserve Ben Bernanke lives on but he was concerned with deflation last year and instituted Quantitative Easing (QE) to spur inflation. Inflation on things we consume like food, energy, and basic raw materials have been increasing during the recession. Thus, I see inflation across the board in every commodity.
Tewksbury: Rising costs are a reality of running a business in the 21st Century. Therefore, we are always very cognizant of rising material costs and the challenges posed by them. It would be easy to simply pass along increases to our customers, but that only makes us a part of the problem. We need to view it as an opportunity to become part of the solution. We are never satisfied with status quo, so we're always looking at ways to reduce our costs by improving purchasing practices and manufacturing efficiencies. When we become part of the solution, and our customers become aware that we are trying to maintain costs, it further cements the bond of loyalty and partnership.
Yerecic: Commodity material cost increases are a reality across the globe. This is a problem that isn’t going away soon. Converters and their suppliers must creatively work together to take out costs in every possible way. Anything that doesn’t add value is waste and must be eliminated or minimized. In the end consumers must bear all costs but it’s our responsibility to make sure we’re not passing on increases that could be eliminated by running our businesses more efficiently.
D’Angelo: There is inevitability to the cost of materials going up, certainly over the long term with sharper fluctuations up and down short term, but mainly up. As a press supplier, we have worked diligently and in partnership with printers and converters to assure that materials can be saved throughout each step of the on press and off press operations, particularly in the startup phase of these processes. These will go far in helping customers level out the impact the inexorable upward march of raw material costs has on them. Such developments can have a huge impact on the bottom line but the fact of the matter is that most material goes out the door in the form of converted finished product and that has implications for the packaging buyer and the end user. Presses are becoming more and more efficient. The race is on…
Lanham: Raw material increases are always a major concern and will be in 2011. While most companies look inwardly and strive to defer the impact of a price increase to the customer, we focus first on what the impact of an increase will have on our customer. It begins with excellent communication, understanding and forecasting. While we cannot control global supply and demand, the price of feed stocks, shortages, outages and the plethora of components impacting the stability of price, we can communicate, document and help our customers plan for these uncontrollable events. Studying the impact of price increases during ‘peace time’ helps to reduce the anxiety of the dreaded inevitable price increase.
Biggest ConcernFP: What do you think will be the biggest concern in 2011?
Lanham: Raw material price increases.
McClure: Inflation as well as crude oil and energy going crazy.
Lewis: Recruiting bright young talent to keep our industry invigorated, technologically savvy and moving ahead of the curve.
Tewksbury: Maintaining a high level of customer service. We like to think that Pearl has spent a quarter century building its reputation; therefore, we will continue to protect it.
Yerecic: Companies that haven’t invested in new technology or adopted leaner processes during the recent recession and early recovery will struggle to successfully compete. Consolidation of the industry will increase as the economy improves. I believe this is a concern for companies of all sizes but especially for smaller converters and suppliers. Matching up against larger competitors that bring a broader array of solutions to the market will continue to be a challenge. Developing strategic alliances will be critical to the success of smaller companies.
Donahue: The greatest challenge and concern for 2011 is sustaining the economic recovery.
D’Angelo: A push from the Executive Branch for increased government regulation, particularly as it relates to recyclability, landfill and mandates regarding packaging media. This push will potentially be contrary to the desires of the new Congress. The response from competing packaging media will play a role in how this concern turns out as well.
I feel there is a looming renewal of the fight among various forms of packaging for the hearts and minds of the consumer and the food, beverage and consumer product companies. I imagine the lobbying will be intense as the intentions of the Administration relative to regulation become better defined. Part and parcel with this is whether the Administration takes a run at Cap and Trade in this legislative year. I sincerely hope not.
Biggest ChallengeFP: What do you think will be the biggest challenge in 2011?
Lanham: We see a strong potential for margin erosion due to increased raw material costs, employee benefits, healthcare, fuel and utility costs. Our plan is to offset as much of these costs as possible through the design of practical cost saving solutions and alternatives.
Tewksbury: With growth comes the challenge to consistently deliver that exceptional experience. Our goal is to remain innovative and improve upon research developments and product opportunities despite the challenges of meeting today's increasing worldwide market demands. Even developing countries are demanding high quality converting and extrusion equipment enhancements.
Lewis: For our industry, and for most companies, the challenge in difficult economic times is to obtain the financial resources necessary to execute a growth strategy. Another challenge we see – from both customers and competitors – is a reduction in technical and engineering staff due to cost-cutting. This leaves fewer resources for developing new products, technology and processes. For this reason, our strategy has always been to focus on the innovation and find more creative ways to cut costs when necessary. We feel this approach ultimately delivers more competitive value to our customers.
D’Angelo: Rising raw material costs and rising interest rates. These two challenges, should they continue to evolve, can hamstring business, regardless of the strength of its day-to-day activities, its vision and its business planning acumen. Like the consumer in day-to-day life, in a business-to-business transaction, the buyer is not happy to take on additional costs, even if the relationship is long standing and solid.
Yerecic: Narrow web converters and their suppliers will need to find more unique ways to bring value to their customers and ultimately to the consumer. This is really an ongoing challenge, but it seems to intensify with each passing year.
Meet the Experts
vice president – business unit web fed, Bobst Group North America
years with the company/in the industry: 28 years/12 years
president, Flexible Packaging Association
years with the company/years in the industry: 10 years/25 years
Larry L. Lanham
president & CEO, Polymer Packaging, Inc.
years with the company/in the industry, 25 years/32 years
Timothy B. Lewis
vice president of marketing and sales, CMD Corporation
years with the company/in the industry: 17 years/24 years
Jon T. McClure
president and founder, ISO Poly Films, Inc.
years with the company/in the industry: 12 years total
vice president, Pearl Technologies, Inc.
years with the company/years in the industry: 20 total
president & owner, Yerecic Label
chairman of the board of directors, TLMI
years with the company/years in the industry: 35 years total
Bonus Question: SustainabilityFP: Do you see sustainability as the continuing trend to hit in 2011? What other trends do you see around the bend?
Lanham: Yes. The sustainability issue is here to stay and will continue to elevate. It appears to now be driven from pressure from the public in general. Similar to a customer-driven marketing campaign that takes on a life of its own, consumers will continue to drive the demand for cost effective eco friendly alternatives.
One issue for the industry will be clarification on how sustainability is truly defined. Also, recycling of flexible packaging may ultimately take on a very important role in this debate.
Lewis: Sustainability is a business practice that is here because it is one that makes sense.
At CMD, we have steadily introduced sustainability initiatives with an eye for delivering more value to our customers. The most obvious trend we see is towards maximizing capital equipment performance – in terms of speed, efficiency and the ability to convert new and exotic film blends – from extreme down-gauging to compostable resins and films made from a variety of post-consumer and post-industrial content.
Regardless of the sustainable value of the film, it still has to seal, fold and wind reliably to be converted efficiently and thus, sustainably.
McClure: Ultimately, sustainability is nothing new because as long as I have been in this industry, over 30 years, there’s been a push to lower the amount of raw materials consumed per unit, thus decreasing our carbon footprint. Other trends will include new raw materials.
Tewksbury: Yes, sustainability will continue to be a trend as it is a moving target where you can't put your finger on it and say, “There! That's been solved – let’s move on.” Another trend we're seeing is the need for flexibility in converting companies. There is a growing market segment concentrating on the high-value niche packaging that requires high quality equipment that is versatile because of the smaller production runs. This has lead us to produce some new lines of products that can change quickly from one application to another.
Yerecic: The focus on sustainability and best environmental practices will continue to gain momentum in 2011. TLMI has made sustainability a central focus of the association's strategic plan and in 2008 introduced the L.I.F.E. Certification Program. The L.I.F.E. (Label Initiative for the Environment) Program was developed in order to assist TLMI members to find cost effective ways to reduce their companies' environmental footprint. It is a program that is designed specifically for the narrow web marketplace and addresses four key elements of this sector: clean production, energy and greenhouse gases, product and environmentally preferable materials, and management practices.
As environmental accountability pressures continue to increase across the supply chain, it's imperative that packaging associations equip their members with the resources they need to make us all better stewards of the environment.
Donahue: Sustainability is a fact of life and sustainability strategies have become integrated into every aspect of the flexible packaging industry. Sustainability, by other names, has been one of the hallmarks of the flexible packaging industry since the early 1950s. FPA began talking about the source reduction benefits of flexible packaging in the late 1980s. FPA continues to undertake studies that confirm the sustainability advantages of flexible packaging, which include less energy use and greenhouse gas emissions during manufacturing as well as energy saving in transportation and less waste.
D’Angelo: Not only will the sustainability trend continue, but it will reach farther into the supply chain and scorecards will begin to rate companies on an even broader scale. We’re having discussions with potential customers about consumption of electricity by our presses and other green measurements. The discussion about up-time and down-time has evolved to include the consumption of materials and inks during press setups. A printer can now quantifiably sell the greenness of their printing process to potential customers. We are designing presses with this in mind and we have partnered with several customers in these types of presentations.
Bonus Question: New DemandsFP: What kind of new demand do you see happening within the industry? Has anything taken you by surprise?
D’Angelo: The growth in the speed of demand, expressed in several different ways in the flexible packaging industry, has been a surprising phenomenon. Customers demand quick, flawless execution, be it end users of their suppliers or printers and converters of theirs. Operational excellence is the hallmark of how first class companies respond to the speed of demand. There can be no compromise, nor should there be.
McClure: I see demand for high quality film remaining strong. Nothing has really [taken me by surprise] – we have been adding capacity over the past 24 months.
Tewksbury: Something that has really surprised me is that developing nations are buying our products at an ever increasing rate. This is a market that for decades traditionally wouldn't be interested in such products due to cost. Now cost seems no longer a factor but has been replaced by the desire for quality. We're even seeing a keen interest in new innovations.
Donahue: There will be accelerating growth in the industry with new materials and applications meeting consumer demands for convenience and extended shelf life.
Lewis: The demand for more speed. We have seen major initiatives in the past 18 months for more machine capabilities in terms of speed and efficiency. Process management tools are expected, like data acquisition and remote diagnostics, along with the expectation that as a supplier, you are well versed in overall equipment effectiveness requirements and can offer the technical solutions to help customers hit their targets.
Lanham: Specialized stand-up pouches with fitments, and closures and further developments in reclosability. As seen in Europe, Asia and South America, U.S. markets should experience a faster emergence of these superior product offerings in 2011 and beyond as more filling equipment expenditures are made at the processing level.
The slow rate of change in the U.S. [has taken me by surprise]. Perhaps inhibited by a recessionary economy, suspect governance, taxes, healthcare, tight money supply and general lack of confidence in all, capital expenditures bolstering growth and innovation within many companies has been low. With an abundance of cash and retained earnings in many corporations, this trend may change, allowing for a robust increase within the flexible packaging space.
Bonus Question: PoliticsFP: Last year, we asked a question about the current political administration. Now that we have reached Mid-term, are you concerned with legislation affecting your business? How so?
Lewis: Everyone is affected by the reality of legislation and each industry and company needs to make strategic decisions to minimize any negative impact, or to fully utilize benefits that may be derived from favorable legislation. This is just the nature of doing business in a democracy. We are optimistic that lawmakers and the executive branches of our states and federal government will work together to strengthen our economy and our business climate.
McClure: President Obama will have to work with the Republicans, and the Republicans will have to work with the Tea Party Republicans to get things done. Speaker Tip O'Neill had to work with President Ronald Reagan, and under Reagan and O'Neill government only grew on average 2.5 percent per year. Under President Obama, Speaker Nancy Pelosi and Senate Majority Leader Harry Reid, government grew a whopping 12 percent back-to-back years. The federal government cannot take in 16 percent of GDP and spend 25 percent of GDP for long.
Thus, I see the changes in Washington as a positive for our business and industry. Split Government is a good thing.
Tewksbury: There is always concern about legislation. Legislation generally is founded on good intentions fueled by a campaign of misinformation. The labor legislation that was in committee would have had a huge impact on our businesses and inadvertently would have given advantages to our overseas competitors. Hopefully, this will be tabled. The move to ban plastic bags is going to be an ongoing battle. If enacted, it will have a devastating effect on our businesses and will cause a ripple effect throughout the nation's economy. New York recently brought such legislation to a vote and narrowly defeated it. This is a real issue for the plastic bag industry.
We have to do a better job of getting the truth out regarding sustainability, environmental impact, and the lessoning of carbon footprints versus paper. Health safety issues, often overlooked with using reusable cloth sacks, need to be brought to the forefront. This is a battle of the minds for both the public and its officials who are reasonable when properly informed.
Donahue: The current Administration appears to be making some correction in strategy and with the new Presidential Chief of Staff, William Daley, and other changes in the administration’s economic team, it is reasonable for business to be optimistic. The new Republican dominated House of Representatives should be successful in putting the brakes on the still Democratic dominated Senate and any legislation that would negatively impact business. However, the Republic House will have a harder time filling their campaign promises because they can’t go it alone.
D’Angelo: The extension of the Bush tax cuts and the extension of the accelerated depreciation for equipment placed in service prior to the end of 2011 will have a beneficial effect on our customers and on the industry in general. The fact that the uncertainty regarding these issues was resolved prior to the end of 2010 was a relief to many.
I mentioned earlier in this discussion my fear of a renewed look at regulation this year. I have a big concern that this will occur outside the legislative arena and not in accordance with the wishes of the Congress. In other words, it will be anti-business.
Both of the above mentioned points will have an effect on the industry in 2011: One is very positive and one is potentially very negative.
Lanham: With the recent elections leveling the decision making playing field within the federal government and many state and local governments, I believe both consumer and business confidence has been raised dramatically over 2010. Starting with the existing tax rate extension of two years, companies can now act on their desired plans as opposed to maintaining in a wait and see mode.
Bonus Question: Remaining ThoughtsFP: Any other interesting thoughts on the industry?
McClure: Overall, I believe we have a strong and growing industry.
D’Angelo: I remain intrigued by one of the ways in which the industry views itself – through the prism of mergers and acquisitions (M&A) activity. I understand it from the point of view of investment and if the industry is returning its cost of capital and then some. M&A reports abound and do seem to receive a great deal of scrutiny in the FPA State of the Industry report. The national trend to bigger being better certainly comes into play with the fact that a large percentage of the industry’s production is concentrated in a small group of individual companies (with lots of plants to produce). Even more interesting is how the big and the small exist together in the current business environment, both providing valuable solutions for their customers and somehow each bringing an entrepreneurial and can do spirit to the marketplace.
M&A shouldn’t necessarily be viewed as a glimpse into the health of the industry. I believe the health of the flexible packaging industry lies in the variety of its companies, niches and means of production and how they all somehow fit together. Purchasers of flexible materials, flexible packaging and related products therefore have incredible choices and the ever evolving range of these choices gives all of us in this industry a daily glimpse into the future.
Lanham: As stated earlier, I’m bullish on growth and feel it may well outpace industry projections for 2011.