AKRON, OHIO (Jan. 12, 10 a.m. EST) — The flexible packaging industry started on a down note in 2003 with the closure of several companies and the shutdown of many plants.
Yet, by the end of the year, many within the industry thought that forced consolidation was just a sign of an industry preparing for an upturn.
Whether the economy and a potential rise in consumer spending in 2004 allow that to happen remains to be seen.
However, 2004 could be a much better year than 2003, if only because many companies already have taken their lumps, said Huston Keith, a consultant with Marietta, Ga.-based Keymark Associates Inc.
In fact, 2003's troubles were nothing unusual for a fragmented industry that still is lining up to get in competitive formation.
“There hasn't been anybody setting outlandish [sales] records, but you really haven't heard of a large company having major hard times, either,” Keith said. “The usual number of people have shut down, but then again, someone bites the dust every year. It doesn't mean anything more spectacular is going on.”
Some might have looked at the custom-bag and commodity-film end of the business, though, and think that the sky was falling in 2003. A big name, Plassein International Corp., filed for Chapter 11 bankruptcy protection in May and then sold off its assets. Two smaller extruders, Apple Plastics International LLC and Orange Plastics LLC, also closed.
Those companies faced competitive threats globally, from China specifically, and a market that squeezed out profit.
But overall, flexible packaging companies continued to perform a little better than the economy, Keith said. The food market continued to grow, and extruders converted products from other materials, especially in retort pouches for everything from tuna fish to squeezable yogurt. And with Wal-Mart Stores Inc. leading the charge, film for case-ready meats on store shelves moved slightly forward, he said.
On the acquisition front, companies are expected to show sharper growth in 2004, said Thomas Blaige, chief executive officer of Chicago-based investment banking firm Thomas Blaige & Co. LLC. Many processors are thinking of pulling the trigger on acquisitions and gaining size in an industry dotted by too many smaller players, he said.
But the run-up in polyethylene resin prices put some of those plans on hold, he said. That should change in 2004, at least according to companies looking for acquisitions, he said.
More and more, the industry will become one of have's and have-nots, Blaige said. Some companies will attempt to grow their competitive position, while others will continue to disappear, he said.
“Companies that have managed themselves effectively during the past two to three years should grow with the economy,” Blaige said. “Companies that have neglected to invest in plant and equipment and technology could continue to have problems.”
A December study from U.S. Bancorp Piper Jaffray Inc. of Minneapolis showed that flexible packaging companies have been less enthusiastic about capital spending than other segments of the packaging industry.
On average, spending as a percentage of sales averaged 5.1 percent for the five-year period ended in 2002.
For rigid plastics companies in the packaging industry, spending represented 6.4 percent of sales.
But for makers of custom film, a more specialized market, the spending equation is probably different.
There is little money to be made in commodity films, so companies in those markets will continue to cut costs to compete, said David Solomon, managing director of investment firm Goldsmith, Agio, Helms & Lynner LLC in New York.
Witness Tyco International Ltd., a maker of many types of film that happens to be closing commodity-film plants at a fast clip to keep costs in line.
Others, including Bemis Co. Inc. and Pactiv Corp., still are investing in companies and equipment as they explore the specialized end of the market, Solomon said.
Those companies, as well as Sealed Air Corp. and others, should continue on that expansion path in 2004, he said.
“You're looking at areas that are more technology-related,” Solomon said. “On the demand side, not only do you have [gross domestic product] growing, but you have continued substitution for rigid packaging.
“There's nothing wrong with demand; it's just that nobody can make any money in a commodity market.”
And there is money to be made, judging by recent headlines. In a blockbuster move, Alcan Inc. just completed its purchase of Paris-based Pechiney Group. The sale includes a large film group owned by Pechiney in North America.
It gives Keith reason for optimism in 2004.
“Flexible packaging is a very high-production, low-margin kind of business,” he said. “You're going to see companies become more aggressive to gain market share.”