What does 1999 hold for plastic packaging? New technologies, low resin prices, convenience and continued consolidation will bolster market growth.
One of the hottest topics—and one that is drawing much speculation—continues to be beer in plastic. Beer is just one example of how new technology will manifest itself, said Frank Mechura, president of Constar Inc.
``A variety of high-barrier technologies have been developed. Resin is at a low price. The economies of new technologies are attractive,'' Mechura said recently by telephone.
This emerging technology will usher in hundreds of millions of plastic beer bottles around the world in the next year, he said. For example, Anheuser-Busch Cos. Inc., Bass Brewers Ltd. and Miller Brewing Co. all use different technology — from multilayer coextrusion to an oxygen-scavenging barrier. But what resin they will use continues to be a matter of debate.
``[The brewing companies] are not going to be able to use $1.50-$1.70-a-pound material just because it's got a better barrier,'' said Cranial Capital President Tim Burns. ``That will not be acceptable to the beer companies. I think PET will be the bulk base material for the foreseeable future, but there could be a host of other barrier layers or coatings and things of that nature that act as crutches as they move along.''
``The demand for beer is in the billions, but we won't see a wholesale revolutionary switch until after 1999,'' Mechura said. He believes the breweries' party line — that beer in plastic will be sold at carry-away and on-site venues such as convenience stores, stadiums and new niches that are relatively undeveloped.
Burns agrees. ``It's not going to wipe out glass and cans by any means,'' he said. ``But I think 20 percent of the overall package mix on a volume basis is a pretty credible and sizable undertaking.''
Doug Groh, vice president of Lazard Freres & Co. LLC in New York, thinks beer in plastic will become mainstream sooner, possibly within a year.
But Burns warns that there are still some issues to be worked out.
``I think the beer companies have to be very, very careful to introduce it selectively in new sizes and price points that ensure profitability and success.''
Plus, the infrastructure is less developed than can and glass bottle markets.
``The can and glass bottle have these things nailed,'' Burns said. ``They've been doing it for 20-50 years. But to me, the biggest vote of confidence for plastics was Owens-Illinois's acquisition of BTR [plc's packaging businesses].'' Owens-Illinois supplies 50 percent of Busch's glass bottles.
Beer is not the only product making the jump to plastic. Mechura said Constar has a large number of such changeover projects under way.
``Much is based on product characteristics — PET doesn't break, it has economic advantages and it is easier to recycle than glass,'' he said.
And for now, processors can't beat the price of PET. ``Resin is in long supply,'' Mechura stated. ``There is a lot out there.''
But, it's just a matter of time before prices go back up.
``Yes, there's capacity everywhere, but if the beer thing at all starts to materialize, we could have tightness develop by the end of 1999, Burns warned.
There is one other thing rigid plastic packagers can count on, Burns said: The environmental nemesis will be back.
``We can't expect the environmental thing to sit still,'' he said. ``We've become very efficient in terms of container wall thickness and material usage and waste. But we still haven't had this major breakthrough where economics and environment is a one plus one equals two or three.''
On the U.S. front, the carbonated beverage and water industries have exemplified how efficient plastic packagers have become, striving to be competitive while gobbling up market share.
``The 20-ounce bottle has still got some supermarket shelf space to gobble up,'' Burns said.
With the soft drink market growing 3-4 percent, Burns predicts PET products will grow two to three times that, taking business from cans. Other markets taking share from glass and cans include hot-filled wide-mouth plastic jars packaging jams, jellies, spaghetti sauce, pickles and relish.
``These will become commercial to some extent in 1999 with and without a barrier,'' Mechura said.
The price of resin not only is affecting rigid plastic packaging, it is the No. 1 issue for all resin converters, according to Richard Wambold, executive vice president and general manager of specialty and consumer products for Tenneco Packaging.
``Resin converters are wondering what impact deflation of resin will have on business in 1999,'' Wambold said.
When resin prices decline, converters are forced by the marketplace to give up some of these resin savings in the form of price reductions. Converters try to keep their margins constant during this period of time, but often distributors who are working on a markup from their cost actually lose margin. When resin prices hit bottom, resin suppliers give up a lot and converters and distributors are forced to follow them down in pricing but don't feel quite the same degree of pain.
``What's going to be the reaction to all who are involved in the supply chain?'' Wambold asked. ``Profit margins are being squeezed. All of us, all three tiers of the supply chain, have seen significant deflation and given up some margin. All of us have seen deterioration in margin in the last two years. I expect resin suppliers to increase prices next year.''
Inflation will continued to hit the food packaging industry in other areas too, such as supplies and labor costs.
Like single-serve beverage bottles, home meal replacement is driven by convenience. The segment is growing at 4 percent and is expected to stay there—a healthy gain, Wambold said, in an economy that may grow only 2 percent.
Home meal replacement also has used new technologies to solve requirements for barrier, anti-fogging and shelf life, said Robert Sinclair, global business manager of polyester films and packaging with DuPont.
He agreed that the segment is exploiting new opportunities. With a stronghold in North America, it is growing in Europe and just getting started in other world markets, he said.
Another niche for DuPont is in case-ready meats packaged in films that extend shelf life, accommodating longer distribution cycles.
``Flexible packaging has a modern look, while cans are outdated,'' Sinclair said.
DuPont is seeing a trend in more ground meats, roasts and steaks being prepared outside the butcher shop at a central location—a setup that cuts costs and eliminates health risks but requires more sophisticated packaging.
While many mega-mergers have taken place in recent years, those in the industry still see consolidation possibilities in spite of tightening credit standards.
``Packaging suppliers have been faced with the requirement of growing to meet their customers' needs or losing significant business volumes,'' said Mark Working, founder and principal of Zachary Scott & Co. ``In an industry with plenty of capacity, mergers have made more sense than acquiring more equipment.''
``Polyester film will continue to consolidate,'' said David Davidson, global business director of polyester films at DuPont. ``Acquisitions, mergers and joint ventures are a positive trend. It leads to healthier companies participating in the marketplace.''
The trend is not limited to flexible packaging, Burns said. The hottest markets for mergers and acquisitions are plastic containers, with a host of small to midsize packaging firms remaining. But he believes the emphasis will be in Europe.
``Many of the logical acquisitions have now already occurred,'' Working said. ``Bigger only makes sense if cost and/or service efficiencies are possible. That means companies with similar equipment and processes make the most logical combinations. In many segments, capacity has now been aligned among consumer product competitors. Customers may not like having a common supplier with its primary competitor.''
The emphasis is more on long-term economics and less on strategic alignment with customers, he said.
The challenge to consolidation will be financing, Groh said. That's not to say acquisitions won't occur, but Working said there are fewer reasons to consolidate than in the past five to seven years.
``The capital markets are contributing to a more conservative credit and valuation environment,'' he added. ``Our experience is that in this environment, entrepreneur owners will be less inclined to entertain the sale of their business other than in a crisis situation.''