ATLANTA — Expect the packaging industry giants to get bigger.
That was the overarching theme from Packaging Strategies '99, the annual gathering of industry executives, held March 22-24 in Atlanta.
The forces pushing consolidation came as no surprise: overcapacity that kills margins and poor stock performance for what is mostly a mature industry. In addition, packaging firms are not yet reaping the expected rewards for following their customers globally.
But some of the details may have come as a surprise.
The stretch film market, for example, has 1 billion pounds of demand yet is faced with a staggering 1.7 billion pounds of capacity, said John Powers, executive vice president of sales and marketing for AEP Industries Inc.
The industry guessed wrong on demand for stretch bundling, which is designed to replace corrugated boxes by putting multiunit packages in single units wrapped in film, he said. Resin and equipment suppliers were touting a market estimate of 1 billion pounds by 2000, Powers said, but instead stretch bundling is now just a 50 million-pound market.
South Hackensack, N.J.-based AEP recently sold off its assets for making OPP film, another market troubled by overcapacity, to rival Applied Extrusion Technologies Inc., which plans to shutter some of the lines.
Jeff Haworth, northeast regional sales director for AET Films in New Castle, Del., said consolidation is needed to boost profit. ``Something has to be done about moving pricing. We are in such a low point,'' he said.
Acquisition-minded Huntsman Packaging Corp., which made two unsuccessful bids for AET, ran somewhat counter to the global consolidation push. President and Chief Executive Officer Richard Durham said North America remains its best opportunity for growth: ``We have had mixed experiences in our overseas operations.''
However, Salt Lake City-based Huntsman Packaging is looking at acquisitions in Brazil and less seriously in Argentina. The company nixed a Brazilian joint venture that Blessings Corp. was considering when Huntsman bought Newport News, Va.-based Blessings last year, Durham said.
Profit margins in packaging have declined from 13 percent in 1980 to 8-10 percent today because customer consolidation gives buyers more leverage and historical practices of using old equipment in developing markets does not work much anymore, said George Staphos, a senior analyst and director of research for Salomon Smith Barney in New York.
``When you look at the supply-chain economics in plastic, it is all about the same,'' said Richard Wambold, executive vice president of specialty products for Tenneco Packaging. ``The more you pull things together and consolidate, the more you are able to pull costs out and bring that to your bottom line.''
Most executives and analysts who spoke at the conference were bullish on consolidation, although packaging industry analyst Tim Burns said industry is sometimes too quick to consolidate. Executives sometimes ignore the benefits that come to smaller businesses from technology changes and smaller footprints of new packaging machinery, or the problems of managing a merger, he said.
``Is consolidation a profitable strategy or a creative sinkhole?'' asked Burns, president of Cranial Capital Inc. in Cleveland. ``I think there is weight to be had on both sides of that story.''
Wall Street's disrespect for packaging company stocks is not new, said William Avery, chairman and chief executive officer of Crown Cork & Seal Co. Inc. in Philadelphia. The industry is considered mature and its customers' push to globalize has not benefited the packaging industry much, he said.
``I think there is some truth in that statement,'' Avery said. ``We are not in the same position with profits as some of our customers. ... We're not Coca-Cola — we're a commodity business with small profit margins.''
Avery said Crown's plastics business, which is about 20 percent of its sales, is now strong, a different position from two years ago when Avery said he would have considered selling it. Crown Cork closed six PET plants in August 1997.
``We've reached a point with plastics where we are making a profit,'' Avery said. ``I'd say it's a keeper.''