Solo Cup Co., moving swiftly to reduce overcapacity in the wake of its $800 million acquisition of rival Sweetheart Cup Co., will close three Chicago-area plants by early next year.
What's more, Highland Park, Ill.-based Solo's plans for a new, $100 million manufacturing and distribution plant at the old U.S. Steel site on Chicago's southeast side could be scrapped. Solo said a decision on that project will not be made until the company is further along integrating Maryland-based Sweetheart's operations.
Two plants on Chicago's southeast side will shut down by year-end, followed by a Solo plant in suburban Wheeling in January. Operations from the shuttered plants and many of the 400 people who work there will shift to three other local Solo production sites, company executives said.
The strategy behind Solo's consolidations is to reduce the number of single-product plants. Thus, paper coffee cups and the plastic lids for them would be made under one roof and shipped directly to customers or to Solo distribution centers.
``It makes the overall supply chain shorter and we can respond to customers more quickly,'' said Patrick Bye, Solo's senior vice president for operations integration.
For years, privately held Solo and Sweetheart have been two of the biggest operators in the $10 billion-a-year disposable food-service products industry. Customers include national retailers and fast-food chains that buy products ranging from plastic forks to paper place mats. The firms are projected to have combined annual sales of $2.2 billion.
Bye declined to provide specifics about Solo's goals for the plant consolidations. It's no secret Solo wants to boost profit margins by reducing costs and increasing capacity utilization.
Still, a larger Solo faces many of the same pressures that caused Sweetheart to sputter in recent years. Solo is heavily leveraged with junk-rated debt of about $800 million. Its operating margins have been stuck at about 10 percent, compared with the industry range of 13-16 percent.
Fierce competition and excess capacity have kept product prices low. Profit is squeezed further by rising oil and paper costs. Plus, prices for resin used in plastic containers have risen 45-50 percent in the past three years, said Ghansham Panjabi, an analyst for Lehman Bros. of New York.
Still, Panjabi said Solo should be able to use its size to its advantage, and he predicts more consolidation is on the horizon.
``They're a more-formidable price-setter now in the marketplace,'' he said. ``Solo-Sweetheart is a good first step toward getting the industry more focused on increasing profit margins.''