Making Lemonade in the Converting Industry

No one, least of all me, likes to be known as Chicken Little, who ran through the barnyard screaming that the sky was falling. Lately, however, I'm wondering if I'm truly acting like Chicken Little when it comes to the state of the industry's health. Certainly the situation is not quite as severe as Chicken Little would describe it, but I'm not alone in my concerns. Others, whose jobs require that they take a close inspection of bottom lines, have expressed nervousness.

My concern over this matter goes back to last February when I received some information on how mergers and acquisitions were on the rise for midsize manufacturers and their suppliers. I even wrote an editorial about it. In addition to this information, I had simultaneously received some literature from the Flexible Packaging Association (FPA), Washington, DC, stating their own concerns about how consolidations would impact the flexible packaging industry. Thomas Bryce, then FPA chairman, asked how the industry would survive in light of all the consolidations.

Well, this issue and yet another were the subject matter of two new press releases that recently passed my desk. Each gave me cause for renewed concern.

On June 3 the FPA reported in its 1995 Operating Ratio Report that the "net profit for flexible packaging converters dropped to a five-year low of 3.5% in 1995, the smallest profit the industry has recorded since 1988." Perhaps this information could be ignored if it weren't for the fact that the FPA also shows that "net profit as a percent of net sales were down 1.5% in 1995 from 5.0% in 1994 and 5.3% in 1993, making it the second consecutive year that profits have declined."

The press release goes on to explain that the drop in profits on the part of flexible packagers corresponds to a "sizeable increase in costs for 1995. The cost of raw material, manufacturing expenses, and sales and administrative expenses were sharply higher. Sales and administrative expenses climbed 3.6% to 14.1% last year as the industry experienced a record number of mergers and acquisitions; however, the cost of materials was still the major component of the increased costs."

Even more disconcerting was the difference between net profits for all US manufacturing and that of flexible packaging. The gap widened in 1995 with net profits before tax as a percent of net sales for all manufacturers at 7.9%, while for flexible packaging it was 3.5%.

In a sister manufacturing area, the Packaging Machinery Manufacturers Institute (PMMI), Arlington, VA, is concerned about a slightly different but closely related subject: downsizing, specifically in the engineering departments of food companies.

A PMMI news release asks what impact these downsized engineering departments are having on packaging machinery manufacturers. C. Peter Wylie, PMMI Education Committee chairman, explains, "Downsizing, a phenomenon of the 1990s, has left us with a lot of questions. PMMI members need insights on how downsizing opens the door to new opportunities for better meeting customer needs."

Perhaps this is the classic case of trying to learn how to make lemonade when you've just been handed a case of lemons. The Institute is awarding its first annual Competitive Research Grant to Dr. Stephen A. Raper, coordinator of the packaging engineering program, Univ. of Missouri-Rolla. He will report his findings in December on how the practice of downsizing affects "traditional selling methods and how...[it] influences the broader customer relationships that have traditionally existed between end-users and machinery manufacturers."

Having this knowledge will allow packaging machinery manufacturers "to provide the best products and services in the most cost-effective manner."

Perhaps converters should tackle a similar study on a more proactive basis?

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