Decisions, decisions. For packaging producers, the choices of what to do in the future are more ubiquitous than a happy-face sign at a Wal-Mart store.
Several speakers at Packaging Strategies 2004, held March 23-25 in Atlanta, spoke of some of the migraine-forming pressures facing top executives at North American packaging companies. While existing markets - especially for food - are normally a straight line of stability, the decisions facing those executives are not.
``Do you become a niche player or a global cost producer?'' Jim Peters asked in a rhetorical aside during the conference's opening session March 23. Peters is president of Oak Park, Ill.-based packaging consulting firm J. Peters Associates.
``Do you work with the big club stores, the retailing giants? Retailing is driving a lot of changes in packaging,'' he said.
Processors must decide how much business to give to Wal-Mart Stores Inc. without shooing away any hope of profitability. But packaging producers also must cope with a coming industry consolidation, especially in the plastics sector, and the growth of China as a global power.
But first, some good news about the industry. In a March 24 speech that tempered a bit of the concern from others at the conference, Jerry Jasinowski said manufacturing is in good shape and poised for a sharp rebound.
Jasinowski, president of the Washington-based National Association of Manufacturers, said many firms are making comebacks from a difficult economic era. The gross domestic product has grown at an average 6 percent rate for the past two quarters, Jasinowski said. And capital spending, a road sign of confidence in the future, increased 9-10 percent in the same period.
The industry faces some challenge from China and other new markets around the world, Jasinowski said. But many companies have found opportunities there, while curbing costs through Six Sigma and lean standards and innovating both production and process, he said.
While Jasinowski spouted optimism, others spoke of a more winding path to achieve prosperity. Several topics will continue to challenge packaging producers in the next several years.
The most prominent is that of China, especially for makers of flexible packaging. While most speakers agreed that the Asian country will be a force, the duration of its influence was debated. Ken Brooks, senior vice president at Ernst & Young Corporate Finance Inc. and the firm's global packaging specialist, said the market invariably will go elsewhere after China has its run.
However, the next three to five years should show greater demand from the Asian market, he said. That should lead to more margin pressure on packaging firms and a need to capture business in developing markets, said Brooks, who is based in Montreal.
``[Production] will be generally stable in developed countries, but Asia will have more capability to exceed demand,'' Brooks said. As a point of fact, two-thirds of packaging production from U.S. companies with operations in China was sold in China, Brooks said, based on figures from November.
Jasinowski also talked about the rising power of China, Singapore and new markets around the world. While he does not espouse protectionism, he said the playing field for trade needs to be leveled. But he, like others, is uncertain of the long-term consequences of Chinese trade.
``There's no rationality in what some people are saying,'' Jasinowski said. ``Our policy is to find out what's what before we decide what to do about it.''
How packaging companies respond to global markets will dictate success, Brooks said. The same goes for the trend of consolidation in plastics packaging. Companies using other materials, such as glass and metal, already have gone through major consolidations, said Thomas Blaige, president of Chicago-based investment firm Thomas Blaige & Co. LLC. Blaige said the global plastics packaging market is moving toward that same goal. The number of plastics packaging deals more than doubled last year, from 61 in 2002 to 125 in 2003, he said. Many of them were driven by global activity or by large companies wanting to divest operations.
Of those 125 deals last year, 64 percent involved a foreign buyer or seller. The largest single sector for packaging deals was the film and sheet area, with a commanding 41 percent of the deals last year, Blaige said.
Toledo, Ohio-based Owens-Illinois Inc. plans to sell its large plastics bottle business, a deal that could change the blow molding landscape. And Alcan Inc., a maker of aluminum- and plastics-based packaging, just bought Paris-based Pechiney Group in another market-changing event that affects rigid and flexible packaging.
More-domestic issues also are on the minds of packaging executives. Working with Wal-Mart was a key theme, in an era when the retailing giant has grown to become one of the largest companies in the world. The retailer most resembles an old military post exchange, or PX, where any goods under the sun can be purchased, said Timothy Burns, president of private equity firm Cranial Capital LLC of Solon, Ohio.
Yet, Wal-Mart, with 4,906 stores at last count, is not a beneficent sugar daddy to its many packaging suppliers, Burns said. In fact, a supplier would be better off running far from Wal-Mart than inking a long-term contract with the retail monolith, he said.
The deterioration in a packaging company's pricing far outweighs the initial volume bump that a company gains by working with Wal-Mart, Burns said. Constant cost and price pressures start to eat into profit, competitors sometimes are brought in to audit a supplier's pricing and a supplier is hamstrung from doing business elsewhere, he said.
``There's a realization that Wal-Mart is carrying your baby,'' Burns said. `` `Always Low Prices' [Wal-Mart's slogan] is not a means of wealth creation.''
However, Wal-Mart could be peaking. Its stock price has dipped, a sign of less confidence from investors, Burns said. And the retailer has had difficulty opening stores internationally.
A few other trends in packaging also will affect the future of suppliers. They include the advent of radio frequency identification, called RFID. Those small electronic tags placed on shipments include electronic chips with antennae that are encoded with information and allow tracking of products, said Phil Henry, senior technical architect of Intel Corp., based in Santa Ana, Calif.
The chips are being touted by Wal-Mart, Target Stores Inc. and the Department of Defense, among others. But who will pay for the technology? ``Wal-Mart certainly isn't going to do that,'' said Terry Harper, vice president of technology and support for Atlanta-based converter Printpack Inc.