One way to beat the overall market? Innovate

At a recent plastics industry conference, I had the pleasure of watching a presentation by a senior manager of a rapidly growing manufacturer of plastics packaging. He shared numerous insights, and I was particularly interested in his outlook for future market demand for plastic products and how this outlook shaped his company's competitive strategy.

His forecast called for total market demand of plastics packaging in the United States to increase at a rate no faster than the growth in the overall U.S. gross domestic product. The packaging industry is large, diverse and mature; therefore, demand for packaging products is dependent on population growth and the underlying health of the macroeconomy. This outlook corresponded with the trends that I have observed in the industry for the past few years.

His company's strategy for the future was to use this moderate rate of growth in total demand as a tailwind. He went on to explain that his company expected significantly greater rates of internal growth that would be achieved through innovation and gains in market share. In other words, the external conditions that currently prevail are conducive to good, old-fashioned competition. His strategy is to be one of the winners.

Given current market conditions, I cannot offer better counsel than that.

With that in mind, I offer a chart with my forecast of the rate of growth in U.S. consumer spending on food. The Commerce Department defines this as expenditures on food products purchased for off-premise consumption. This is spending on food products at grocery stores, not at restaurants. It is the biggest end market for plastics packaging products such as film, bottles and caps and closures.

I like this data series better than overall GDP as an indicator of trends in the packaging sector. The differences are subtle, but there are times when the trends in food spending and in the overall economy will vary.

The chart shows that spending on food products has been steadily chugging along at a 2 percent rate throughout the entire year. This is a little better than the average rate in 2016, and it is noticeably slower than the average rate we enjoyed in 2014 and 2015. If you calculate the average annual growth in this category since the recession ended in 2009, you get a rate of 2.5 percent. Keep in mind I have created this chart to show the rate of growth in the data, not the actual spending levels.

My forecast for 2017 is for the trend to maintain its current trajectory, giving us another year of 2 percent growth. In 2018, the gradual upward trend in wages and salaries that continues to prevail in the United States will nudge the annual growth in spending on food up to the long-term average growth rate of 2.5 percent.

That gives us a baseline for overall demand for plastics packaging products in the near-term; average conditions will persist during the next few quarters. This will keep a solid floor under the market, but if you want to grow faster than the market, you will have to innovate and compete.

One trend that should generate a more intense level of competition in the marketplace can be seen in the chart on corporate profits for the food industry. Overall spending levels for food may have grown at a rather pedestrian rate in recent years, but the growth in profits has been robust.

There was a dip in the first quarter of this year, but the first-quarter numbers for this series can be deceiving. I will need to see sharp declines for another quarter or two before I become too concerned. For now, I think this chart looks pretty healthy.

Faster-than-average growth in demand for packaging products usually occurs when a surfeit of new products are coming to market. It takes money to research, develop and market these new products. This money comes from profits. When profit levels are strong, new projects get funded and the pipeline of products with new designs and materials gets filled. If profit margins get tight, there is a tendency to defer new ideas until a more auspicious time in the future.

The current economic conditions in America are both well-established and consistent, and if pressed to summarize them in just one word, I would say they are "good." The current state of the U.S. economy should not be high on most peoples' list of worries. As long as profit levels remain at their current levels, then innovative companies that are strong competitors will be able to grow faster than the overall pace of growth in the market. Good managers make money when market conditions are consistently improving.

But if you are anything like me, this consistency can tempt you to look for something more exciting. Politics often get conflated with economics, and politics are certainly exciting at the moment. I occasionally find myself drawn in with all of the debate and rancor. The desire to have my personal political philosophy affirmed by current events can result in a temporary lack of focus that is impartial.

But my job is to report on emerging market conditions and offer sound, nonbiased analysis about future probabilities. For the packaging sector, my impartial outlook calls for moderate, steady growth.