Packaging is one industry sector that seems to be a sure thing when it comes to increasing manufacturing opportunities, and plastic will outpace paper. According to a report from the Freedonia Group, a Cleveland-based industry research firm, in 18 selected markets where plastic and paper compete as packaging materials, plastic is expected to increase its share of the market to 53 percent (in pounds) in 2010. "This percentage understates plastic's share since less plastic is required than paper in most applications due to its lighter weight," according to the report. "Plastic's share of the packaging market will expand at a slower pace than in the past decade, as a number of packaging applications are now fairly mature in terms of the share controlled by plastic."
Packaging is more than just a "container" in today's competitive environment; it has actually become a way for companies to promote and differentiate their products in a crowded market. It's one of the few industries where the benefits of local supply are obvious: close proximity to the customers makes it easy to keep the supply line full without having to ship "air" long distances, and reduces the need for "safety" stock. For the food and beverage, cosmetics, and pharmaceutical segments, it is critical for the major OEMs to have packaging plants located near the "fill" plants.
One good example is Essel Propak UK Ltd. As a primary contractor for Procter & Gamble, Essel Propak chose Danville, Virginia, because the P&G facility that the company supplies is only 30 minutes from the Essel Propak plant. Essel Propak, under the banner of its Arista Tubes business, manufactures tubes in a multilayer lamination process for oral care, cosmetics, pharmaceuticals, food, and household products. The company's Danville plant operates nine high-speed lines that can produce from 180 to 240 tubes per minute, depending on the line.
"Basically, we're here because it's close to P&G, and we wanted to eliminate non-core costs," said Adrian Spencer, the company's director of business development. "And, Virginia is a very competitive place in which to do business." A second facility, Danville Plant #2, came online the first quarter of this year. Danville promotes itself heavily to the packaging industry as a strategic means to "replace industries that have left, including textiles, tobacco, and furniture, with high-tech polymer research," says Ronald Moffitt, director and research associate professor at the Advanced and Applied Polymer Processing Institute.
Alcan, Inc., a leading global materials company with a range of specialty product divisions, announced last November that its Alcan Packaging Shelbyville (Kentucky) division will invest $27.5 million in an expansion of that facility. According to the company, the plant is the only North American facility in the packaging industry dedicated to pharmaceutical flexible packaging materials. "This expansion will provide additional capacity that will meet projected growth in the North American pharmaceutical packaging industry over the coming years," says Michael Rubenstein, Alcan's president.
Proximity to fill plants is critical in dairy products, and demand for dairy packaging is projected to expand 4.1 percent to reach $4.3 billion in 2010, according to the Freedonia Group. While aggregate consumption (per capita) of dairy products is projected to remain flat, packaging demand will benefit from trends such as a larger variety of dairy products in smaller convenience-oriented container sizes, and from favorable growth in spending on food eaten or prepared away from home. Some of the growth items are multipacks (pudding, Jell-O) and drinkable yogurt, which is packaged in bottles rather than less-costly cups.
Consolidation and Relocation
To gain economies of scale and reduce costs to manufacture, many packaging OEMs are consolidating operations. That means if a particular location is a prime one for the company, odds are that the company will bring other divisions from other states and merge the operations. According to financial services provider BMO Capital Markets, mergers and acquisitions (M&A) activity in the packaging sector during the first half of 2006 was quite heavy. In the 12 months ending June 2006, 341 deals were announced in the packaging sector, with a deal value of more than $52 billion. Rigid and flexible packaging companies -including paper, plastic, metal, and glass packaging - were the biggest drivers of M&A activity during 2005 and the first half of 2006, accounting for 39 percent and 28 percent of activity, respectively.
Consolidated Container Company of Atlanta is one of the more active packaging companies with respect to acquisitions. The company, a leading producer of blow-molded plastic packaging, operates 62 plants across North America with 575 manufacturing lines and 4,000 employees producing some seven billion packages a year. In February of this year, Consolidated announced its intent to acquire substantially all of the assets of Whitmire Container, with blow-molding operations in Sherman, Texas, and Blue Mountain, Mississippi. This came on the heels of Consolidated's purchase of the assets of Quintex Corporation's operations in Utah (July 2006) and Spokane, Washington (November 2006). The company serves major OEMs in the food and beverage and consumer products markets.
Consolidation in the packaging industry is also driven by a need to accommodate customers' moves and remove manufacturing redundancies in acquisitions. For example, during the second quarter of 2006, Alcoa Packaging of Pittsburgh, a packaging and consumer business within Alcoa, Inc., completed the consolidation of its custom thermoforming operations in a new pharmaceutical and medical packaging center. Existing medical thermoforming operations were relocated from Wheaton, Illinois, and Cumberland, Rhode Island, and those facilities closed. "This move allowed Alcoa to invest in a new, medical packaging industry standard Class 100,000 Clean Room within a plant that already had an established track record servicing the pharmaceutical community as well as other key markets," says Birmal Kalvani, Alcoa Packaging's president.
Berry Plastics Group Inc., headquartered in Evansville, Indiana, announced in April that it had completed its acquisition of Covalence Specialty Materials Holding Corp. in a stock-for-stock merger. Covalence is the leading producer domestically of trash bags, duct tape and laminate and coated products. To accommodate continued growth, Berry also announced the construction of a new 600,000-square-foot warehouse and an additional $23 million investment in its current Evansville operations. The Indiana Economic Development Corporation is providing $500,000 in tax credits and $100,000 in infrastructure grants for the project
Arkay Packaging is an 85-year-old "boutique" company that began life in New York, and grew to become a major package designer and manufacturer for the cosmetics industry. Mitchell Kaneff, the company's chairman and CEO and the grandson of its founder, began moving the company's operations to Virginia in 1996. In 2005, Arkay moved the last of its manufacturing to Virginia. "This business has changed dramatically," he says. "Relationships are still important but globalization demands price, quality, on-time delivery, and innovation to be successful."
Medical and pharmaceutical packaging demand is being impacted by several factors, including the demographics of an aging Baby Boomer population, increased regulations for tamper evidence, increased spending on healthcare and pharmaceutical, and a projected increase of sterile medical packaging for surgical procedures. According to the Freedonia Group, pharmaceutical packaging demand will grow by nearly 10 percent annually through 2010.
Growth in rigid packaging for medical applications will include products such as thermoformed trays and blister packages for sterile surgical applications. Medical and pharmaceutical represents about 7 percent of the demand in the flexible packaging arena, with products such as bags, film to cover sterile trays, and other wraps.
Perfecseal, a Bemis Company, produces healthcare products such as co-extruded films, laminated films, flexible forming films, foil barrier films, and pouches. Headquartered in Oshkosh, Wisconsin, the company announced last October a substantial expansion plans that include facilities in New London, Wisconsin, as well as two foreign plants. The New London expansion will more than double the size of existing facility, allowing room for a world-class, state-of-the-art foil laminator for high-barrier medical and pharmaceutical packaging. According to company officials, the new laminator will be contained within a controlled atmosphere, clean-room environment, which will allow Perfecseal to meet stringent particulate standards.
Another big change in the packaging sector is the push toward "green" packaging, which means alternative materials, and a drive toward source reduction which requires smaller, lighter-weight packaging that can be easily recycled or that is biodegradable or compostable. Some alternative materials that are causing excitement include polylactic acid or PLA, produced by NatureWorks LLC, a company that converts corn starch in to a biodegradable plastic for use in packaging.
Cereplast, Inc. and MeadWestvaco Corporation teamed up last year to develop a fully renewable and biodegradable (or compostable) extrusion-coated paperboard product made with Cereplast resins that have a PLA base from NatureWorks. The paperboard product will be used by Solo Cup to manufacture into cups. The application will answer consumer interest in compostable food service products that are made from renewable resources.
Metabolix, Inc., a company developing and commercializing environmentally sustainable and totally biodegradable natural plastic, announced in December that it had received permits for a commercial manufacturing facility designed to produce 110 million pounds of biodegradable natural plastic annually. The facility is being constructed in Clinton, Iowa, as part of a joint venture agreement with Archer Daniels Midland. The natural plastic commercial manufacturing facility will be located adjacent to ADM's corn wet mill in Clinton, and will utilize starch from the mill's existing corn grind capacity as raw material. Commercial production of natural plastic is expected to begin in 2008.
Green packaging is catching on big with major retailers eager to reduce the impact of packaging in the environment. "The essence of sustainable packaging is going beyond the biodegradable product and bringing the product cycle full circle to a true `cradle-to-cradle' system," according a report issued by Piper Jaffray & Co., a financial services and M&A consultancy. "The prominence of sustainable packaging has grown tremendously in the food and beverage industry because of consumer demand and the growing awareness in these markets."
Piper Jaffray reports that in 2005, shipments of sustainable packaging for the food and beverage industry, the largest segment of sustainable packaging, exceeded $37 billion, and is expected to surpass $42 billion by 2010: "Sustainable plastics are the fastest-growing environmentally friendly material of packaging as demand for both rigid and flexible forms continues to increase, and plastics continue to take market share away from glass."