Proceed with caution: global packaging industry trends12 November 2012
Industry analyst Canadean looks at how the changing economic climate may shape the global packaging industry over the next year and what opportunities this new landscape may offer, and warns that optimism is waning among some of the major players.
Over the coming year, the potential for revenue growth within the international packaging industry will fall compared with the previous 12 months. That is the broad conclusion of Canadean's latest research into the sector. In its 'Global Packaging Survey 2012-13', published midway through 2012, it found that almost half (44%) of respondents were 'more optimistic' about revenue growth over the next 12 months compared with the previous year (see Table 1). A further 35% were 'neutral', while 17% were 'less optimistic' about their company's revenue growth prospects.
However, in spite of what seems to be a positive response, optimism has marginally dropped in 2012 compared with 2010 and 2011. In 2010, 61% of respondents were 'more optimistic' regarding revenue growth, a figure that remained more or less constant at 59% in 2011, and dipped to 44% in 2012.
However, on a macro level, the results from 2010, 2011 and 2012 show little variation, suggesting that initiatives implemented in 2010 and 2011 have been sustained, and that the industry is progressing at a steady rate.
Strong growth in emerging markets such as India and China has contributed to increased revenue optimism. India's packaging sector is growing considerably and is expected to increase over the next two years due to high demand from industry sectors such as food and beverage, and pharmaceutical packaging.
Moreover, global market recovery will aid growth as it will result in increased demand for packaging machinery in Latin America and Asia-Pacific. In April 2012, for example, Shiner International, a packaging solutions supplier based in China, announced a 28.4% increase in its Q4 2011 revenues to $22.9 million from $17.8 million in Q4 2010.
Flexible packaging is also forecasted to be one of the fastest-growing sectors, driven by industry consolidation and sustainability initiatives. However, 35% of respondents express neutral observations about revenue growth. This could be attributed to the fact that companies exercise caution and small businesses are reluctant to undertake large investments following the European debt crisis in 2011 and the economic slowdown in North America.
How will the sector respond?
The changing economic environment has forced companies to reconsider their business structures and incorporate necessary changes. Overall, the key changes forecast in the business structure for packaging industry buyers in 2012 have not changed considerably from those identified in 2011.
The top three are 'improving operational efficiency', 'new products and services', and 'expand in current market' (see Table 2). In 2011 the priorities for packaging industry buyers were 'expand in current market', 'improving operational efficiency' and 'new products and services'.
As a technology-driven market, new, efficient and cost-effective packaging products and services are always in demand, driving manufacturing companies to innovate. The survey results demonstrate that 67% of respondents from packaging buyers plan to develop 'new products and services'.
Plans for 'expansion in current markets' is another important factor for respondents, similar to the results recorded in 2011. In response to growing demand from local markets, packaging buyer companies continue to look to increase their product lines and expand facilities at existing locations.
Mergers and acquisitions
Overall, executives from the global packaging industry expect increased levels of consolidation, with 55% of respondents anticipating either a 'significant increase' or an 'increase' in M&A activity over the next 12 months. Interestingly, there was no substantial change in expectations of consolidation among packaging companies in 2012 when compared with 2011 survey results.
Large packaging companies are seeking small and specialised outfits to strengthen their core competencies, reduce costs and resist competition with their enriched product mix.
The higher levels of consolidation expected in the global packaging industry are also due to new cost or demand pressures, repayment of debts, the potential need to meet new compliance procedures or gain quick access to new markets, expansion, and attempts to increase market share.
During the 2011 Canadean survey, the key reasons identified for M&As were the need to expand geographical presence, promote the optimisation of mill capacity and to increase new capabilities. For 2012, the main reasons for an increase in consolidation in the global packaging industry have changed to new equipment acquisition, an increase in operational efficiency and enhanced growth opportunities. In addition, a high proportion of executives forecast that due to market uncertainty, small companies may find it difficult to sustain credit lines and would look to larger companies for support.
Favourable monetary policies have also made finance more easily available, resulting in positive expectations. Consequently, there has been a sharp increase in leveraged buyout activity.
Other factors that help to create a favorable environment for mergers
and acquisitions include:
- steady improvement of the global economy
- improvement of the global equity market
- a low-interest-rate environment
- company drives to achieve synergies and reduce costs.
'Raw material prices', 'market uncertainty' and 'responding to pricing pressure' are the most immediate business concerns for the industry. Buyers see 'quality', 'level of service' and 'price' as important factors when selecting a supplier, whereas 'supplier's environmental record', 'supplier's CSR reputation' and 'proximity of supplier operations' are the least important.
Additionally, buyers across all regions rank 'innovate products' as the leading action suppliers should take to secure business, while senior-level executives identify the need to 'innovate products', 'provide support for generating new business' and 'reduce prices'.
Buyers, regardless of region and annual turnover, are also looking to prioritise 'internal operating cost reductions' for the next 12 months. The implementation of e-procurement is a priority for 33% of respondents, while 31% confirm they are in the process of implementing e-procurement. In total, 64% therefore indicate acceptance of it, which is evidence of the prime potential for IT services in the global packaging industry.
- Across the industry, 44% of respondents are 'more optimistic' about revenue growth for their company over the next 12 months.
- Of all respondents, 49% from companies operating in North America are optimistic about revenue growth over the next 12 months, compared with 42% in Europe and 44% in the rest of the world.
- Respondents from large and small companies are 'more optimistic' about revenue growth than those from medium-sized companies, with 46% and 44% respectively expecting growth in revenue in the next 12 months.
- The top three key expected changes for 2012 as identified by buyer respondents are 'improving operational efficiency', 'new products and services' and 'expand in current market', views that have not changed significantly from results obtained in the 2011 survey.
- Overall, executives from the global packaging industry expect to see increased levels of consolidation, with 55% of respondents anticipating either a 'significant increase' or an 'increase' in M&A activity over the next 12 months.
- 'New product development' and 'machinery and equipment purchase' will record a significant increase in capital expenditure over the next 12 months.
- A total of 28% of respondents from global packaging buyer companies and 36% from supplier companies anticipate a minimum of 2% increase of their current workforce.