Higher domestic material costs, an increasing inventory-to-sales ratio, and end-user consolidation and price concerns contributed to a decline in net profit for converters in 1999. Halfway through 2000, “conditions turned sour” as those same factors further reduced profitablity. That’s the bad news for converters from the Flexible Packaging Assn.’s State of the Industry Report 2001. The good news is that stand-up pouches and further rigid-to-flexible conversions are predicted to boost flexible packaging sales by 3.5% this year. In its Executive Summary, the report analyzed several macroeconomic issues regarding the flexible package converting business. Data from the report was based primarily on FPA’s 2001 Outlook Survey of member converters and suppliers. Among the survey’s highlights are the following: • The pace of end-user consolidation slowed in 2000 vs the previous year, though mergers and acquisitions are expected to continue to be prevalent during the next five years. • In 2000, labor shortages of hourly workers affected eight of 10 converters, with three in 10 experiencing a shortage of salaried employees. However, those numbers were down from nine in 10 and four in 10, respectively, in ’99. • Flexible packaging exports increased 6% to $824 million in ’99, the latest year such information was available. When it comes to people power, 44% of converters said they expect to increase their levels of hourly employees this year, while only 17% expected a decline in hourly workers. For salaried workers, the numbers were 32% and 16%, respectively. Those increases make sense considering that 80% of converters expect this year to be better than 2000, while 12% predicted that the two years would be the same. Only 8% envision 2001 will be worse than last year.
Voicing concerns Converters were asked to express their most important concerns for this year compared with 2000. “Volume” received the most votes at 40%, with “filling up capacity” mentioned most frequently as the cause for this concern. “Market competition” and “material costs” were each cited by 20% of the converters. Concerns about costs of materials reached its highest level in seven years. Those were followed by concerns identified as “labor issues” and “other” at 8% each and “fixed costs” at 4%. Other findings: • Newer “technological adhesives” were expected to experience the most usage growth among converters, while solvent-based ink use was predicted to trend downward. Respondents anticipated an increase in water-based ink use. • Ninety-six percent of converters expected the majority of their production to be for multiweb structures in the next five years, due in part to the complex structures needed to replace rigid materials. • Stand-up pouch converting continues to grow, with 64% of converters saying they are involved in the technology, up from 52% last year. • Cutting costs is the key reason why end-user companies are turning to flexible materials. To increase market share and to expand existing markets, some converters are planning either expansions or mergers and acquisitions (Chart A, p. 30). FPA noted that only 40% of converters are planning to expand, representing a survey low. Among those, few planned to build a new domestic plant. Survey respondents could select multiple responses to the question concerning expansion and merger and acquisition activity. With that in mind, 70% of converters plan to expand an existing domestic plant this year. FPA pointed out that 50% of converters plan to participate in a domestic merger or acquisition this year, which represented a survey high. According to the report, a survey low of 60% of converters are expected to purchase new or used machinery this year. “This coincides with the sluggish economic data of the last half of 2000, and projections for slower growth in 2001,” said the report. A new or used press was the most likely piece of equipment to be purchased (Chart B). However, for the second consecutive year, no converters contacted in the survey said they planned to purchase a digital press. Asked to express their vision for the next five years, survey respondents were allowed to select among multiple issues. The top forecast, selected by 56% of converters, was the continuance of mergers and acquisitions. Tied for the next most-likely scenario at 31% were technological advances and industry growth. Next came “niche” opportunities at 19%, followed by tight profits/margins at 14%.
See the story that goes with this sidebar: Flexibles to stretch beyond $19 billion in sales
