- October 01, 2006, By Frank Perkowski Business Development Advisory
There has been a lot of excitement in recent years about the growth in flexible packaging substrates and the many benefits these petroleum- and metal-based substrates provide. This growth, unfortunately for paper producers and their converters, has come at the expense of paper-based packaging materials to a large extent.
The growth in manufacturing outsourcing also has had a negative impact on domestic paper packaging demand, as packaged goods companies increasingly develop local packaging suppliers in these markets.
The net effect of these developments, combined with small increases in consumption in some end-use categories, has been overall declines in domestic shipments of paper-based packaging substrates since 2000.
Figure 1 shows the overall shipment trend of paper-based packaging materials since 1988. Paper-based materials showed steady growth until 2000, when the combined effect of substitution and outsourcing began to have a significant negative impact. While difficult to see in this graph, the biggest drop occurred in bleached and unbleached kraft papers, mostly due to the shift to flexible film materials.
While not growing, paperboard grades and the higher value packaging and industrial paper grades have managed to stay fairly even since 2000. Unfortunately, given the growth in the overall packaging market, these dynamics have resulted in share and volume declines for paper as a whole.
Paper Dominates Some Segments
Despite this poor performance in the past five years, paper-based packaging materials still dominate key segments and represent nearly two-thirds of the $115 billion packaging market. Figure 2 shows paperboard grades such as corrugated and folding/carrier carton as well as lighter-weight labels and paper bags still represent significant volume and share markets for paper-based materials.
While paper lost share in flexible packaging, sanitary, multiwall, and other categories, it will continue to be the preferred substrate in many applications that value the key benefits of disposability, low environmental impact, low cost, good print surface, acceptable durability and strength, and good converting performance.
With the recent price increases for petroleum-based materials, film-based substrates are forecast to become more expensive relative to paper-based materials. A look at historical price trends does not reflect the likely changes in relative prices in the future, but it still shows film-based substrates generally have been more volatile and more likely to reflect higher pricing over time.
Figure 3 shows price index trends for major converted packaging substrate materials since 1995. The graph shows how little packaging material prices have changed over time, despite recent price increase announcements.
Within packaging, however, it is clear that aluminum foil has been the most volatile and highest cost material and that both aluminum and film prices have tracked at higher levels versus paper since the base year. This reflects the dynamics in many categories where paper-based materials establish a floor price for packaging that keeps the price of the other materials in check.
The challenge in the future will be for paper-based converters to continue to offer attractive pricing options to the customer while continuing to offer value-added features and benefits.
A recent market study of specialty paper-based packaging materials analyzed the markets, applications, demand level, historic growth, and forecasted growth rates of more than 20 packaging paper grades (excluding paperboard) in North America. The study reveals a broad range of pricing, demand levels, and growth rates.
As an example, Table I (see p54) provides a recap of the largest and fastest growing packaging paper grades. Heavyweight papers represent the largest volume paper segment, reflecting a broad spectrum of specialty papers and applications. Other large paper segments include label release base, label facestock, and foodservice papers.
As seen on the right side of the table, only a few grades are forecast to grow at significantly higher rates than overall GDP growth. Conversely, security and smart papers will become high-growth segments, though this growth will come off a low volume base.
Nontraditional Growth Strategies
While there will exist a few high-growth opportunities within the paper packaging market segment, most paper packaging markets are mature and increasingly will be threatened by substitutes and lower-cost offshore packaging suppliers.
Conducting business as usual by relying on increased advertising and promotion, new pricing strategies, account and regional expansions, new products, and product line extensions will not generate growth or improve profitability. These tactics will just raise the cost of doing business and make the overall market less attractive over time.
To avoid this situation, paper packaging suppliers need to implement nontraditional growth strategies that will grow their sales and profits effectively. Examples of these strategies include the following:
- Integrate the business with the customer base. This will reduce supply chain costs and improve the efficiency of the supplier and customer operations. It will result in high customer loyalty levels and lead to higher margins.
- Leverage intangible/hidden assets. These assets may represent more value than plant and equipment. These assets can be categorized as:
- company information, knowledge base, and unique capabilities
- business networks/relationships
- brand/corporate branding
- customer relationships
- strategic real estate.
- Develop strategic partnerships/alliances with suppliers, customers, and/or competitors where appropriate. Operational redundancies can be eliminated and stronger value propositions can be created.
- Increase service offerings. Most paper-packaging suppliers are manufacturing-oriented. Through strategic outsourcing, collaboration, and a solutions orientation, related service offerings will become a more critical component of the business and generate higher margins in many cases.
- Focus on solutions. By integrating products and services from strategic partners, solutions can be offered that address customer needs and result in increased customer loyalty.
- Expand into adjacent markets/segments. This could involve related products or services that result in a more valuable combination determined by customer need as opposed to internal capabilities. In this way, the portfolio of products and services would be difficult to duplicate.
- Provide closed-loop packaging solutions. With the growing customer concerns around environmental responsibility, sustainability, liability, and supply chain/system costs, there is an opportunity for packaging suppliers to provide closed-loop packaging material supply systems for their customers. An effective system is largely in place for corrugated materials, but systems for paper and other materials still need to be developed.
- Optimize the supply chain. Significant inefficiencies still exist in the form of excess suppliers, lack of standardization, multiple processes, fragmented services, lack of strategic outsourcing, and lack of collaboration among the supply base. Paper packaging suppliers can take the lead in optimizing the supply chain and improving costs, service, and quality in the process.
- Develop operational excellence via JIT, lean manufacturing, or six sigma for a competitive advantage.
By adopting one or more of these nontraditional growth strategies, paper packaging suppliers will improve their chances of success in an increasingly competitive industry. Effectively implementing these strategies, however, will require the development of new capabilities, a willingness to change, and strong leadership skills within the industry and individual companies. Hopefully, we are up to the challenge!
Frank Perkowski is president of Business Development Advisory (BDA), a management consulting firm based in Marietta, GA. BDA focuses on helping companies in the paper and packaging industry develop and implement effective growth strategies. Frank can be reached at 770/643-9081 or firstname.lastname@example.org.
The views and opinions expressed in Technical Reports are those of the author(s), not those of the editors of PFFC. Please address comments to author(s).
|Rank||Largest Volume||2005 Demand (000 Tons)||Fastest Growing||2005-2006 Growth Rate (%)|
|1||Heavyweight Papers||743||Security Paper/Packaging||6.1%|
|2||Release Base||728||Active/Smart Paper||6.0%|
|3||Label Facestock||690||Release Base||3.6%|
|4||Foodservice Papers||446||Label Facestock||3.4%|
|5||Coating Base/Packaging||403||Carrier Base||2.8%|
|6||Extrusion Laminated||349||Decorative Tissue||2.2%|
|8||Laminating Base||338||Colored Kraft||2.0%|
|9||High Strength Paper||325||Laminating Base||2.0%|
|10||Barrier Coated||299||Foodservice Papers||1.9%|
|Source: BDA Study on Specialty Papers|
Business Development Advisory — PFFC-ASAP 314.