Packaging is supposed to be recession-proof. After all, people have to eat.
That's the conventional wisdom. But as with most bromides, it's easy to poke holes in that theory. Earlier this month, Plastics News reported on financial problems at two of the world's largest blow molders, Crown Cork & Seal Co. Inc. and Graham Packaging Co. LP.
The problems stemmed from too much debt — fueled by aggressive expansion that began in the mid-1990s — and slowing sales and earnings growth.
Debt is hurting publicly traded Crown Cork and still-private Graham. In 1995, Philadelphia-based Crown Cork plunked down $5.2 billion for Paris-based CarnaudMetalbox and its 175 factories around the world. Crown Cork became the world's biggest packaging manufacturer.
New York investment firm Blackstone Group LP bought York, Pa.-based Graham in a 1998 leveraged buyout. Blackstone wanted to take Graham public in 2000 and use part of the money to pay down debt but pulled back after the stock market began to tank.
Certainly, the debt issue is an extraordinary factor. Not every plastics packaging manufacturer has that problem. But packaging analysts say debt at Crown Cork and Graham comes on top of already-challenging market fundamentals, such as overcapacity. Some giant U.S. markets are maturing. Part of the problem stems from the tremendous market penetration of plastics. Beer certainly will give PET bottles a shot in the arm, but after that, there are few materials-conversion jackpots left.
So yes, even when the Nasdaq plunges, people do have to eat. And drink. The question remains: How soon can the packaging sector be merry again?